The PCR Blog

Helpful news, tips and business advice for small to medium business owners about how to maximise profit, minimise waste and grow and protect your business.

Avoiding the Sting of the Death Benefits Tax

While many of us would prefer not to think about the time when we have passed away, it’s imperative to plan ahead to ensure the best outcomes for those set to inherit your assets and ease any possible financial burden.

This is particularly crucial when it comes to estate planning and superannuation.

Did you know that when a member of a superannuation fund (retail, industry or SMSF) dies, any taxable component will be taxed in the hands of non-dependants at a rate of 17%?

If losing a loved one wasn’t difficult enough, this death benefits tax is a huge sting for inheritors. But there may be a way out thanks to recent private binding rulings from the Commissioner of Taxation.


Defining Dependency

Under the Superannuation Industry Supervision (SIS) Act 1993, the Trustee of a superannuation fund can pay a death benefit to a dependant or the legal personal representative of the deceased’s estate.

For SIS purposes, a dependant is defined as “the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship.”

If the beneficiary of the deceased member’s superannuation death benefit is a “death benefits dependant” for taxation purposes, then there is no taxation on the death benefit.

A death benefits dependent of a person who has died, is:

(a) the deceased person’s spouse or former spouse; or

(b) the deceased person’s child, aged less than 18; or

(c) any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or

(d) any other person who was a dependant of the deceased person just before he or she died.

The ATO has ruled that Financial Dependency means NO taxation. In the Commissioner’s private binding ruling  there was NO death benefits tax applied when the Deceased provided the Beneficiaries with ongoing financial support including the following:

  • Regular payment of tertiary education course fees for the First Beneficiary;
  • Provision of supplementary income to the Second Beneficiary for living expenses; and
  • Provision of supplementary income to the Third Beneficiary for living expenses.


The Family Allowance Strategy

As expert SMSF advisers, we are aware many parents provide for their adult children and the adult child’s family on an ad hoc basis. In this case, a formalised Family Allowance Agreement may be the best solution in circumnavigating the death benefits tax.

The Family Allowance Agreement is a monthly or quarterly payment made by a member of a superannuation fund to an adult child and their entire family for the purposes of enhancing their standard of living.

The great thing about the Family Allowance strategy is that they are not just for SMSFs but for all superannuation funds.

Setting up a Family Allowance Strategy is a little different for each type of super fund, however, as experts in superannuation and estate planning, we will ensure that we find a solution that suits you so you can protect your family from the 17% Death Benefits Tax.

Call PCR Accounting & Advisory today on 03 9847 7516  to learn more and discover how we can safeguard your family’s financial future.


Owner of PCR Accounting & Advisory, Peter Marmara-Stewart is a top-tier accountant and financial advisor dedicated to helping clients reach their business goals and achieve financial freedom. Peter is highly regarded for his client-focused approach and entrepreneurial spirit, catering to a diverse range of professionals across a wide scope of industries all across the country. Peter’s expertise can help you plan effectively, set goals, maximise profits and protect your assets. Get in touch today on (03) 9847 7516.