If you’ve inherited superannuation from someone who wasn’t your spouse, parent, or financial supporter, you’re classified as a non-dependant beneficiary. This classification significantly affects how you can receive and manage the inherited funds.
Understanding non-dependant status
Under superannuation law, you’re considered a non-dependant if you don’t fall into specific categories at the time of the deceased’s death. The key dependant categories include spouses, de facto partners, children of any age, and people in interdependency relationships with the deceased.
Tax law has a broader definition of dependants, which also includes former spouses and anyone financially dependent on the deceased. Importantly, children over 18 must have been financially dependent on the deceased to qualify as tax dependants.
If you’re an adult child who wasn’t financially dependent on your deceased parent, or if you’re inheriting from a sibling, friend, or other relative, you’ll likely be classified as a non-dependant.
Lump sum payments only
The most significant restriction for non-dependants is that you must receive your inheritance as a lump sum payment. Unlike dependants who can choose between lump sums or ongoing income streams, non-dependants cannot establish death benefit income streams from inherited super.
Tax implications
Non-dependant beneficiaries face different tax treatment on their inherited super. The tax components of the death benefit determine how much tax you’ll pay. The tax-free component isn’t subject to tax, regardless of your dependant status. However, the taxable component faces different rates depending on whether it comes from taxed or untaxed super funds.
For taxed super funds (most retail and industry funds), the taxable component is taxed at 15% plus the Medicare levy of 2% (17% total) on the taxed element, and 30% plus the Medicare levy of 2% (32% total) on any untaxed element.
However, if the death benefit is paid to the trustee of a deceased estate (your legal personal representative), the Medicare levy does not apply, so the rates are 15% for the taxed element and 30% for any untaxed element. Payment via the estate can therefore provide a tax advantage, though this adds complexity and should be discussed with your adviser.
Claiming your benefit
If you believe you’re entitled to a super death benefit as a non-dependant, contact the deceased person’s super fund immediately. You’ll need to provide documentation proving your relationship to the deceased and evidence of their death.
The fund will assess your claim according to any binding or non-binding death benefit nominations the deceased made. If no nomination exists, the trustee has discretion to determine how benefits are distributed among eligible recipients. It is also a good idea to verify whether the ATO holds any unclaimed super for the deceased.
Planning considerations
Receiving a large lump sum inheritance requires careful financial planning. Consider how this windfall fits into your overall financial strategy, including:
- tax implications in the year you receive the payment;
- investment options for the inherited funds; and
- estate planning for your own circumstances.
The inability to keep inherited super within the tax-advantaged superannuation environment means you’ll need to consider alternative investment strategies for these funds.
Seek professional guidance
The rules around super death benefits are complex, particularly the interaction between superannuation and tax law definitions of dependants. The tax treatment and payment restrictions for non-dependants can significantly impact your financial position. Contact a qualified financial adviser or tax professional to understand your specific circumstances and develop an appropriate strategy for managing your inherited super benefit.
