The Australian Government has announced plans to introduce mandatory standards for large superannuation funds aimed at improving the efficiency and compassion of death benefit payouts. This raises the question: Is there a problem with paying out superannuation when a member passes away?
The Challenge of Distributing Superannuation Upon Death
Superannuation in Australia has grown to an enormous $4.1 trillion industry. However, when an individual passes away, their super does not automatically become part of their estate. Instead, the super fund trustee determines how the death benefit is distributed based on the fund’s rules, superannuation laws, and any valid death benefit nominations made by the deceased.
Concerns about delays in accessing these funds have been increasing. Between 2021 and 2023, the Australian Financial Complaints Authority (AFCA) recorded a sevenfold rise in complaints regarding superannuation death benefits, with delays being the primary issue. While many superannuation funds distribute benefits within three months, in some cases, beneficiaries have waited over a year to receive payments. Current superannuation laws only require that benefits be paid “as soon as practicable,” without specifying a clear timeframe.
Ensuring Your Superannuation Goes to the Right Beneficiary
Handling superannuation death benefits can be complex. Unless a valid death benefit nomination is in place, the super fund trustee retains discretion over who receives the funds. If a member has not made a valid nomination or let an existing nomination lapse, the trustee may distribute the superannuation to any eligible dependents or to the deceased’s estate.
To ensure your superannuation is distributed according to your wishes, it is crucial to understand the four main types of death benefit nominations:
- Binding Death Benefit Nomination
- This legally requires the trustee to pay the superannuation directly to the nominated beneficiary.
- Most binding nominations expire after three years unless it is specified as non-lapsing.
- Non-Lapsing Binding Death Benefit Nomination
- If permitted by the fund’s trust deed, this nomination remains in place indefinitely unless revoked.
- It ensures that the nominated beneficiary will receive the super without trustee discretion.
- Non-Binding Death Benefit Nomination
- This serves as a guideline for the trustee but does not guarantee the nominated individual will receive the super.
- The trustee can still exercise discretion and allocate the benefit to another eligible dependant or the estate.
- Reversionary Beneficiary
- If you are receiving a superannuation pension, you can nominate a reversionary beneficiary.
- Upon your passing, pension payments will automatically transfer to the nominated individual, usually a spouse or dependent child under 18.
Who Can Receive Your Superannuation?
Superannuation can be distributed to a dependant, a legal representative (such as the executor of the estate), or someone in an interdependency relationship with the deceased. A “dependant” under superannuation law includes:
- A spouse
- A child (regardless of age)
- An individual with whom the deceased had an interdependency relationship, meaning they provided financial support or care to each other.
The Consequences of Not Making a Nomination
If no valid nomination is in place at the time of death, the super fund trustee will determine the recipient based on relevant state or territory laws. In most cases, the benefit will be distributed to a superannuation dependant or the estate’s legal representative for allocation according to the Will.
Common Issues and Delays
Numerous court cases have challenged the validity of death benefit nominations, often resulting in costly and prolonged disputes. To ensure a valid nomination:
- It must be in writing, signed, and dated.
- It must be correctly witnessed.
- The nominee’s full legal name should be used.
- If directing the benefit to the estate, the wording must be legally precise.
Delays often arise when nominations are missing, expired, or invalid. Additionally, disputes can occur when multiple claimants are involved, requiring trustees to navigate complex family relationships before making a decision.
Key Takeaway: Act Now to Protect Your Beneficiaries
Regardless of age, it is essential to review your superannuation nominations regularly to ensure they align with your current wishes. Confirm that your nomination type is appropriate, valid, and up-to-date. While delays in processing death benefits may still occur, having a clear and legally sound nomination in place can significantly expedite the process and alleviate stress for your loved ones during an already difficult time.
Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.
This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
By Zoe Ma @ Pitt Martin Tax
