Our superannuation death benefits and our family home (if we are lucky enough to own one) are the two largest assets for most ordinary Australians.
Yet most Aussies (including most accountants and lawyers) are utterly gobsmacked to discover that their super does NOT automatically form part of their deceased estate when they die, AND that they CANNOT just treat their super like their Will, and give it to whomever they wish, as if their super is just like a bank account.
Intuitively, we tend to think of our Super like a bank account. After all we pay money into this account – which is in our name – and so we assume it will be treated the same as other assets, just like our bank accounts.
In fact Australian superannuation law only allows death benefits to be paid directly from a super fund to a very limited and select group of people in your life, such as your spouse, children, interdependents, financial dependents, or to your estate.
This means that companies, trusts and charities can NEVER benefit directly from your super, and that parents, siblings, cousins, grandchildren and friends will have a very difficult time trying to claim your super. This is the case even if you create a death benefit nomination form in their favour.
(Pro Tip: 90+% of our clients will want to use a Death Benefit Nomination to point their super to their Will rather than bypass their Will. That way, whomever you nominate in your Will can gain the benefit of your super without offending the federal super restrictions.)
According to Australian superannuation law, only certain people such as your spouse, your former spouse, children under 18, children between 18 and 25 who are financially dependent on you or someone with whom you are in an interdependent relationship with you at the time of your death, qualify as both a dependent under both superannuation law, i.e as a ‘SIS dependent’ and under taxation law, i.e., a ‘tax dependent.’ If your super goes to someone outside that group (such as adult children, another relative or a charity), the ATO may take up to 30% in tax.
What about grandchildren?
Many grandparents generously contribute to their grandchildren’s upbringing, often helping with things like school fees—an expense that can be substantial. But does paying for a grandchild’s education mean that a grandchild is able to directly receive a grandparent’s superannuation death benefits, and if so, are those benefits tax-free?
Clients regularly ask whether, when they die, they can leave their superannuation to their grandchildren. They may wish to do this directly from their superannuation fund if they think their Will may be challenged.
As discussed above, federal super laws do not permit a distribution to grandchildren directly. However, it is possible for a grandchild to receive superannuation death benefits directly if they fall within either of the last two categories, that is:
- They are a financial dependent on their grandparent; or
- Are in a relationship of interdependence with their grandparent.
The key factor is not the grandchild’s familial relationship with their grandparent, but their financial relationship.
SIS Dependants vs. Tax Dependants
When superannuation was started in Australia in the 1980’s, it was intended to provide financial security in retirement, and not to serve as an estate planning or inheritance strategy. So the system is designed to provide for retirement funding (ie to replace reliance upon the age-pension), but is not well-designed to deal with a lump-sum asset available for distribution after death.
In fact, the system was designed so that you spent both capital and income during your lifetime, with the intention that there should not be much of a balance remaining when you die.
However this is not the way most of us use our super, as we typically prefer to keep the capital intact and to only spend the income. This then typically leaves a large-ish lump sum available for distribution when we die.
The catch, is that this lump sum (called our super death benefit) does NOT automatically form part of our deceased estate. It does not by default get dealt-with according to the terms of your Will, AND it cannot be directly left to just anyone nominated by you. Only certain categories of persons defined in the federal super laws will be eligible beneficiaries of your super death benefits.
There are TWO (large and complex) pieces of federal super legislation in Australia: The SIS Act (Superannuation Industry Supervision Act); and the ITAA (Income Tax Assessment Act).
Restricting who can receive super death benefits ensures that super remains consistent with its core purpose of supporting dependents who were financially reliant on the deceased.
When it comes to assessing if someone can receive your super death benefits, there are two key classifications: SIS dependants and tax dependants:
- The first classification deals with who can legally receive benefits directly from your super fund. A SIS dependant (as defined by the Superannuation Industry (Supervision) Act 1993) (the SIS Act) includes your spouse (current or de facto), child (including adult children), financial dependants, and interdependents. These individuals are eligible to directly receive super death benefits from your fund, subject to the fund’s governing rules.
- The second classification deals with how the death benefit will be subject to tax in the hands of the recipient. A tax dependant (as defined under the Income Tax Assessment Act 1997 (Cth)) (the ITAA) includes your spouses, de facto partners, children under 18, and interdependents. Adult children are not automatically tax dependants. Former spouses are included.
This distinction means that a SIS dependent may receive a death benefit directly from your super fund, but they will only receive it tax-free if they also qualify as a tax dependent. Importantly for our current purposes, both SIS and tax definitions include interdependents. This term is most important from a tax perspective, because if your grandchild qualifies an interdependent then they can receive your super death benefits tax-free.
If you want to know more about who can receive your super death benefits, contact the oldest law firm in South Australia.
What constitutes financial dependency?
A financial dependent can receive death benefits directly from a super fund, but they will not qualify for tax-free treatment.
The Courts have made various pronouncements on what amounts to financial dependence.
The ATO is the regulatory authority for self-managed super funds, and in the case of grandchildren, the main question asked is: If the deceased’s financial support were removed, would the grandchild be able to meet their basic daily expenses? If the financial assistance simply enhances their standard of living rather than covering essential costs, this will not qualify as the relevant standard of support.
According to the ATO, only fundamental expenses are relevant when determining financial dependence. The ATO has ruled that necessities such as food, shelter, and clothing meet the criteria. However, contributions toward entertainment, social outings, hobbies, or pocket money are considered non-essential and do not establish dependency.
Certain education expenses may be included—public school fees have been accepted as relevant in some rulings, but private school fees alone may not be sufficient. Interestingly, costs such as schoolbooks, lunches, and uniforms have been deemed irrelevant for dependency purposes.
Additionally, the ATO requires that financial support represents a substantial portion of the grandchild’s total financial needs. If the household mainly relies on welfare payments or another source of income, the grandparent’s contributions may not be enough to establish dependency. Contributions towards shared household costs, such as utilities or rent, are also pro-rated based on the number of occupants in the home.
Another key requirement is consistency—the ATO expects financial assistance to be provided regularly and continuously rather than as a one-time or irregular payment.
If a grandchild can establish, they were a financial dependent of their grandparent, they are eligible to receive their grandparent’s superannuation death benefits direct from the super fund. However, this will not entitle them to receive the benefit tax-free.
Interdependency Relationships
If a grandchild is in a relationship of interdependency with their grandparent they will be entitled to receive their grandparent’s super directly from the fund, and will also receive those benefits tax-free. This is the ideal outcome.
Section 10A of the SIS Act, states an interdependency relationship exists when two people have a close personal relationship, they live together, and one or each of them provides the other with significant financial, domestic, and emotional support.
In the case of a grandparent and grandchild, an interdependency relationship may be established if:
- The grandchild lived with the grandparent on a long-term basis;
- Either party provided daily care, financial support, and household assistance beyond occasional gifts or payments to the other party (or they did so mutually); and
- There was a mutual commitment to sharing life responsibilities, such sharing housework and care.
For a young grandchild it may be expected that these things are provided by the grandparent to the grandchild. However, the definition works both ways and also covers circumstances where a more mature grandchild provides support to an elderly grandparent.
The existence of an interdependency relationship requires clear evidence of cohabitation, financial reliance, and ongoing personal care. This may include rental agreements, financial statements, or statutory declarations confirming the nature of the relationship.
If you would like to make financial provision for your grandchild from your superannuation or if you are a trustee of a self-managed super fund trying to determine if a grandchild is eligible to receive superannuation death benefits, contact the oldest law firm in South Australia.
So … put your affairs in order, and create a modern integrated estate plan before it’s too late.
When it comes to Wills, asset protection & estate planning in Australia, you can trust the oldest law firm in South Australia, Genders & Partners to guide you through the tough decisions you must make for your family’s future care and welfare.
If you have any questions, or would like further information, please email us. Would you like a quick phone call to discuss? Feel free email us or use this link and book a timeslot for a free 15-minute phone consultation on my schedule.
We can help you to protect yourself and your family. We look forward to being of service.
Want to find out more about super death benefits?
- https://www.genders.com.au/what-happens-to-your-super-when-you-die-part-1/
- https://www.genders.com.au/what-happens-to-your-super-when-you-die-part-2/
- https://www.genders.com.au/why-superannuation-death-benefits-matter-in-your-estate-plan/
- https://www.genders.com.au/a-death-tax-by-stealth/
- https://www.genders.com.au/smsf-is-your-reversionary-pension-really-binding/
- https://www.genders.com.au/super-death-benefits-what-could-go-wrong/
- https://www.genders.com.au/super-asset-protection/
- https://www.genders.com.au/separation-divorce-and-superannuation/
- https://www.genders.com.au/paying-superannuation-death-benefits/
More Estate Planning Resources
All these and many more estate planning and asset protection options are available for discussion with the oldest law firm in South Australia.
Genders and Partners will work with your Financial Advisor and/or Accountant to structure your estate planning as appropriate to your circumstances, including advice as to the use of testamentary trusts.
Disclaimer
The information contained in this document is intended as general information only and has been prepared without taking into account the needs, objectives or financial information of any particular person.
Prior to making any decision, you should assess whether the information is appropriate to your particular needs, objectives and financial circumstances.
While Genders and Partners has taken reasonable care in the preparation of this information, subsequent changes in circumstances (including legislative change) may occur at any time and may impact on the accuracy of the accuracy of this information.
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