Death tax by stealth… & how to avoid it!
There is no such thing as a ‘death tax in Australia!?!
This is a statement we hear regularly, however, this is not entirely accurate. Unlike the UK, we are fortunate that we do not have a legislated death tax in Australia. That said, your superannuation investments can attract a death tax when paid to your beneficiaries known as Superannuation death benefits tax. This is a little-known fact, hence, our reference, death tax by stealth….
To explain:
Superannuation remains the cornerstone on many Australian’s retirements. We are encouraged to contribute as much as we can afford, within the contribution caps, into superannuation in preparation for retirement and are rewarded with tax advantages to do so.
Tax advantages include tax of only 15% of contributions and earnings prior to retirement and 0% on earnings and income payments when you commence a pension in retirement. Tax free income and earnings sounds perfect. This is true until the point when you die and, if you are not careful, the Government collect a death benefit tax which arguably is a repayment for the concessional tax treatment of your superannuation whilst you are alive.
What is Death Benefits Tax?
When a superannuation fund member dies, their remaining balance is paid out as a death benefit. This can go directly to a beneficiary or through the deceased’s estate. The tax treatment depends on:
The components of the super (taxable vs. tax-free)
The relationship between the deceased and the beneficiary
Whether the benefit is paid as a lump sum or income stream
If the beneficiary is a tax dependant (like a spouse, child under 18, or someone financially dependent), the benefit is generally tax-free.
But if the beneficiary is a non-tax dependant—such as an adult child who is financially independent—they could be taxed up to 17% on the taxable component, or even 32% if insurance proceeds are included. In our experience, adult children receiving a death benefit are typically unaware that a death benefits tax is payable on their parents superannuation benefits.
How to Minimise or avoid a death benefits tax
Like many things in our financial system, careful planning, can overcome the payment of death benefit tax. Here is a summary of the options available to avoid death benefits tax:
Re-contribution Strategy
Once you’re eligible to withdraw from super, you can take out a portion and re-contribute it as a non-concessional (after-tax) contribution. This shifts money from the taxable to the tax-free component, reducing the tax your beneficiaries might pay. Be mindful of contribution caps and age limits—speak to a financial adviser before proceeding.
Nominate the Right Beneficiaries
Make sure your Binding Death Benefit Nomination (BDBN) is up to date and directs your super to tax dependants where possible. This ensures the benefit is paid tax-free and according to your wishes.
Withdraw Super Before Death
If you’re terminally ill or nearing end of life and have met a condition of release, you may choose to withdraw your super and hold it in your personal name. This can avoid death benefits tax altogether, as personal assets aren’t taxed upon inheritance.
Consider whether you still need to superannuation
In the later years of retirement, often we think about this when retirees approach their late 70’s, consider whether you still need superannuation. The tax system can be generous for retirees and ‘cashing out’ your superannuation and investing in your personal name can still be done so without attracting tax. This finds the balance between not paying tax whilst you are alive and preventing your estate paying tax.
Use your Estate Strategically
Sometimes it’s better to direct your super to your legal personal representative (LPR) via your estate. This can offer more flexibility in distribution and may help avoid the Medicare levy in some cases.
Review your plan regularly
Superannuation and tax laws change frequently. Regular reviews with a financial adviser or estate planner can ensure your strategy stays effective and aligned with your goals.
Death benefits tax can be a hidden trap in your estate planning—but it doesn’t have to be. With the right strategies and advice, you can ensure more of your super goes to the people you care about, not the tax office. If you haven’t reviewed your super or estate plan recently, now’s the time. A little planning today can make a big difference tomorrow.
General Advice Warning
The information in this article is general advice only. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice to discuss your personal circumstances.