Twenty-three-year-old,
Ashleigh Petrie nominated her mother as the sole beneficiary of her super.
However, Ashleigh’s
63-year-old fiancé was successful in claiming her full super balance after she
died in a car accident.
Ashleigh was in a
relationship with her fiancé, Rodney Higgins for only 7 months (living together
for four of them).
This story highlights the pitfalls
and limitations to super fund death benefit nominations.
Superannuation doesn’t form part of
your will
A super fund is a
type of trust.
That means that no
one has an entitlement to any super funds until the trustee makes an election
to distribute monies i.e. pay a super benefit.
As such,
superannuation does not (initially) form part of your estate and therefore is
not covered by your Will.
The trustee of your
super fund must decide who is entitled to your super balance including any life
insurance benefits (if the policy is held inside super).
Different types of nominations
There are two types
of death benefit nominations:
Binding nominations
As the name
suggests, trustees are bound to follow the superannuant’s instructions as long
as they comply with the super laws (SIS Act).
Binding nominations
can either be ‘lapsing’ or ‘non-lapsing’.
Lapsing nominations
are valid for up to three years but can be changed at any time.
However, a lapsing
nomination cannot be updated if the superannuant loses capacity (although their
attorney may be able to update it).
Non-lapsing nominations
do not need to be updated each year and there for can offer a greater level of
certainty for succession planning.
Non-binding nominations
Non-binding
nominations provide guidance to the trustee as to how to pay a death benefit.
However, ultimately,
the trustee still has discretion as to who to pay a benefit to.
Reversionary nominations
If a person’s super
is in the pension phase, some super funds allow reversionary nominations.
A reversionary
nomination instructs the fund to continue paying a super pension to their
nominated beneficiary such as their surviving spouse.
Reversionary
nominations offer few financial planning advantages.
Who can you nominate?
According to the
super laws (SIS Act), super must be paid to your dependent/s.
If you do not have
any dependents, your super must then be paid to your Personal Legal
Representativewhich is the executor (or administrator if you don’t
have a will) of your estate.
That is, super will
then form part of the assets of your estate and will be dealt with according to
your Will.
The super laws
define a dependent to include (1) spouse including de facto relationships and
same-sexual partners, (2) children of any age including step and/or adopted
children, or anyone deemed to be a child of the member under family law and/or
(3) a person that was in an interdependent relationship with the member (which
involves cohabitating with the member and one or both persons provide financial
and domestic support).
If the superannuant
doesn’t have any dependents, the super benefit must be paid into the deceased’s
estate (Personal Legal Representative) and they will be distributed
according to their Will.
If they don’t have
a will, then benefits will be distributed according to the succession laws in
that jurisdiction.
Who should you nominate?
A super benefit
paid to a financial dependent will be received completely tax-free.
It is important to
note that a financial dependant must meet the Income Tax Act definition to
avoid any tax.
This differs from
the super law definition.
According to tax
law, a dependent is defined as a current or former spouse, a child under 18
years, anyone in an interdependent relationship, or any person that was
financially dependent on the deceased prior to death.
Therefore, to avoid
a super benefit payment being taxed, generally, we advise our clients to
nominate a financial beneficiary.
Most people
nominate their spouses.
How are benefit payments taxed
otherwise?
If super is paid to
a non-beneficiary, any tax liability is deducted by the estate before the
payment is made to the beneficiary.
The amount of tax
depends on the benefits’ components:
- Tax
free. This is usually the
portion that has accumulated because of non-concessional contributions
made after 30 June 2007.
This component does not attract any tax.
- Taxable
– taxed element.This
element is usually accumulated because of making concessional
contributions including employer contributions.
This balance is taxed at a flat rate of 15%.
- Taxable
– untaxed element.This
element includes income or earnings on which the super fund has not paid
any tax on.
This element is taxed at a flat rate of 30%.
When can things go wrong…
Returning to
Ashleigh Petrie’s example which I cited at the beginning of this blog, it might
now be obvious why her super fund paid the benefit to her fiancé.
The reason was that
her mother did not meet the definition of a dependent whereas her fiancé did.
What she should
have done is nominated her Personal Legal Representative i.e.
her estate.
Her (valid) Will
could have nominated her mother as the sole beneficiary and her wishes would
have been carried out.
Care should be
taken when completing super benefit nominations.
You should make
sure they are completed correctly, up-to-date, and adequately witnessed
(usually by two adults that are not beneficiaries).
SMSF’s offer some advantages here
Self Managed Super
Fund death benefit nominations offer some advantages.
Firstly, they do
not lapse after three years.
Secondly, they do
not have to comply with the super dependency laws, as long as the SMSF Deed
doesn’t specifically require it.
This means that an
SMSF member may complete a binding death benefit nomination, nominate a
non-dependent and the trustee is obligated to follow those instructions.
Check your super benefit nominations this week
Unfortunately,
non-existent or inadequate super-death benefit nominations are not uncommon.
Once you know what
you are doing, they are usually easy to check and update if necessary.
I suggest you check
that your nominations are current and accurate this week.
Most super funds
allow you to do that online but you’ll need to complete a paper form if you
need to complete a new nomination.
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Jason Gwerder
Monday, 9 August 2021
