Globally, the highest top estate tax rates can be found in Japan, at 55%. South Korea (50%), France (45%) and the USA (40%). Only fifteen of the thirty-four countries in the OECD have no taxes on property passed to beneficiaries. 

However, in Australia, several factors can influence how tax is applied to your superannuation benefits upon your death, such as your age and whether your super comes from a taxed or untaxed source. The tax treatment of your superannuation death benefits is also affected by whether the benefits are paid as a lump sum or an income stream (i.e. regular payments) and whether your beneficiaries are classified as dependants or non-dependants. 

The first thing to understand is that tax applies only to payments made to ‘non-dependant’ beneficiaries. To be classified as a tax ‘dependant’ and therefore eligible to receive a superannuation death benefit tax-free you must be either of the following: 

• current and former spouses and defactos 
• any children of the deceased who are under the age of 18 
• any other financial dependents. 

For non-tax dependants, tax will only be payable on any taxable component of the lump-sum super benefit, which may include both a taxed and/or untaxed element. The taxable component of your super is the proportion that was originally sourced from concessionally taxed contributions (salary sacrifice contributions and employer contributions) and investment earnings and excludes any proportion sourced from non-concessional or after-tax contributions.  

An untaxed element will typically only arise where the death benefit includes proceeds from a life insurance policy held by the fund, or where the death benefit is being paid from an untaxed super fund, for example, certain government sector superannuation funds. 

The taxed element is subject to a maximum tax rate of 15% plus the Medicare levy. The untaxed element is subject to a maximum tax rate of 30% plus the Medicare levy. 

So what can you do about it? 

There are two options to consider which can assist in reducing tax applicable to superannuation death benefits.

1. Withdraw superannuation benefits while you are still alive, ideally when you retire after age 60 so the withdrawal is tax-free and look to re-contribute funds, up to the allowable threshold as a non-concessional contribution. This strategy can replace taxable benefits with non-taxable benefits and therefore reduce death benefits tax; 
2. Appoint a trusted person as your enduring power of attorney, with instructions to withdraw your superannuation in full if it appears that death is imminent. There would be no tax on the withdrawal, and the money could then be distributed in accordance with the terms of your will after your death. 

When considering the above strategies, it is important to seek the advice of a professional adviser. The tax treatment of each individual’s superannuation benefits will vary considerably and so to their ability to implement an effective withdrawal re-contribution strategy.