Avoiding the Super Inheritance Tax Trap

Michelle Bromley CFP®, Director & Private Client Adviser – Strategy and Advice

Avoiding the Super Inheritance Tax Trap

While death duties were abolished in Australia decades ago, a quasi-estate tax remains in the form of tax levied on the taxable component of a superannuation (super) death benefit paid to certain beneficiaries, particularly adult children. In this article, we cover some key concepts of superannuation estate planning.

Who can receive my super?

Your super is intended to benefit you in retirement, or to provide support for your dependants on your death.

Your dependants generally include your spouse and children plus financial dependents, among others.

If you haven’t made a death benefit nomination the super fund trustee will investigate who your dependants are and exercise their discretion in paying the benefits appropriately.

Alternatively, they may pay the benefits to the Legal Personal Representative for your estate who then adopts the responsibility to distribute to your beneficiaries.

A death benefit nomination allows you to direct your death benefits to your preferred beneficiaries. Most super funds will allow you to make a non-lapsing nomination that the trustee views as binding, giving you greater certainty that your legacy will be paid as intended.

Which beneficiaries get my death benefit tax-free?

Recognising that your super is intended to provide support for people who are dependant on you at the time of your death, the term ‘death benefits dependant’ is applied to the following individuals who can receive your death benefit tax-free:

  • Your spouse  
  • Your children under the age of 18  
  • Any person financially dependent on you
  • Any person with whom you are in an interdependent relationship.

Generally, the benefit can be paid to these people as a lump sum or as an income stream. A minor child can continue receiving a death benefit income stream only until they reach age 25.

Which beneficiaries get taxed on my death benefit?

Unfortunately, not all beneficiaries of super death benefits are equal. Beneficiaries who are entitled to receive a benefit under the superannuation law, such as adult children who are not fully financially dependent, may not be entitled to receive all benefits tax-free.  

Generally, these beneficiaries are restricted to receiving lump sum benefits.

Your super benefit is comprised of up to three tax components.  

  1. The tax-free component is always received tax-free.
  1. The taxable component is received tax-free by ‘death benefit dependants’ but is taxed at up to  
  • taxed element – 17% (inc Medicare levy)
  • untaxed element – 32% (inc Medicare levy)

It’s important to note that the benefit is taxed at the recipient’s marginal tax rate, up to the maximum tax rates shown above.  Therefore, even a non-earning adult child who is not a ‘death benefits dependent’ can receive up to the effective tax-free threshold of $21,885 (including the Low Income Tax Offset for FY 2024) before any tax is paid. Every dollar of taxable component received above this will be taxed at 17% including Medicare Levy.

Case Study

How can I better plan to minimise this tax?

Cash out and recontribution strategy

The first strategy is useful if you have access to your super, for example, you’ve had a change of employment over age 60 but you’re still eligible to contribute (generally, up to age 75).  

A re-contribution strategy is a withdrawal of a super lump sum that is contributed back into super as an after-tax contribution.  It has the effect of ‘washing out’ the taxable component that is withdrawn.

If you’re under age 60 you may have some tax to pay on the taxable component of the withdrawal, but if you’re over 60 the withdrawal is tax-free.

Case Study

Quarantining and directing benefits

The second strategy involves starting pensions at different times to separate taxable benefits from the re-contributed amounts mentioned above, which are always received tax-free.

For example, starting one pension in June before you make the recontribution allows you to start a second pension in July with just the tax-free amounts.  This is a common strategy within SMSFs but can also be achieved using multiple pension products from a regular super fund provider.

Building on this, consider who your ‘death benefit dependant’ beneficiaries are and whether you can direct taxable benefits to them, while directing tax-free benefits to adult children (or other non-death benefit dependant beneficiaries).

Case Study

Withdrawal prior to death

Of course, passing on wealth can be done prior to death by withdrawing super benefits and potentially gifting an early inheritance.

This strategy can be used by those who have achieved a condition of release and can receive benefits tax-free, including:

  • Aged 60+ with ‘unrestricted non-preserved’ benefits  
  • Preservation age (now age 59) with ‘unrestricted non-preserved’ benefits – the 1st $235,000 is tax-free
  • Aged less than 60 diagnosed with a terminal medical condition.

The final strategy works well for those who unfortunately suffer a slower decline or are diagnosed with a terminal illness and have time to put a withdrawal plan into action. In withdrawing from super, consider whether any of your intended beneficiaries are death benefit dependents and able to receive a tax-free income stream as the superannuation environment remains the most tax-effective investment vehicle.

Importantly, to avoid the situation where your illness means you have lost capacity to make decisions and take appropriate action, you should give a trusted person an Enduring Power of Attorney with instructions to withdraw your super in full if it appears death is imminent.


The best way to avoid ‘gifting’ part of your super to the ATO is to plan ahead.

A comprehensive estate planning strategy considers both super and non-super assets, and how to affect the best chance of those benefits flowing into the hands of intended beneficiaries.

Each of the scenarios above has its advantages and disadvantages, and dangers for those who go it alone without obtaining appropriate advice.

Contact your adviser to discuss how best to minimise death benefit tax in your situation.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG ( for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Thank you for submitting your details, now you can download here.
Download Now
Oops! Something went wrong while submitting the form.
Thank you for submitting your details.
Oops! Something went wrong while submitting the form.

Take up this one-time exclusive offer and choose the service and expertise you need to make your SMSF work for you, speak to a specialist today to get started.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Terms & Conditions:
The promotion is not valid for cash or cash equivalent and is non-transferable. Cannot be combined with other offers, discount promotions or promotions. Promotions may be subject to availability. All monetary amounts specified in these terms and conditions are in Australian dollars (AUD). All pricing excludes GST. To redeem this promotion during the promotional period, you must complete the form submission included in the communication or landing page. Stock Doctor, Bell Direct and Prime reserves the right to modify or amend this promotion and cancel or suspend the promotion without prior notice. By completing the form or attempting to participate in this promotion, you agree to accept and be bound by these terms and conditions from StockDoctor, BellDirect and PrimeFinancial. The promotion from Bell Direct starts on Friday 27th October 2023 at 9:00 am AEDT and ends on Thursday 7th December 2023 at 5:00 pm AEDT. The promotion from Prime starts on Friday 27th October 2023 at 9:00 am AEDT and ends on Thursday 7th December 2023 at 5:00 pm AEDT. The promotion includes from StockDoctor: a 30-day complimentary membership to Stock Doctor. The promotion starts on Friday 27th Oct 2023 at 9:00 am AEDT and ends on Sunday 24th December 2023 at 5:00 pm AEDT and $200.00 AUD discount on new members joining Stock Doctor. The promotion starts on Friday 27th Oct 2023 at 9:00 am AEDT and ends on Sunday24th March 2024 at 5:00 pm AEDT.

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 ('Prime'). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information. Privacy Policy | Financial Services Guide

Lincoln Indicators Pty Limited (Lincoln) ABN 23 006 715 573, as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751966, AFSL 483167. This communication may contain general financial product advice or forward-looking statements regarding our intent, belief or current expectations with respect to the market conditions. Caution is advised in placing undue reliance on these forward-looking statements, as our advice has been prepared without taking account of your personal circumstances. Therefore, you should consider its appropriateness, in light of your objectives, financial situation and needs, before acting on it. Before acting on any advice, you should consider the appropriateness of the advice, and we recommend you obtain financial, legal and taxation advice before making a decision. Please refer to our Financial Services Guide (FSG) for more information at Lincoln Indicators Pty Ltd. If our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement (PDS) at Lincoln Indicators Pty Ltd before making any decision. 

The Bell Direct service is provided by Third Party Platform Pty Limited trading as "Bell Direct" (ABN 74 121 227 905) an Australian financial services licensee (AFSL 314341) a Participant of the ASX Limited Group and a Trading Participant of Cboe Australia. Bell Direct does not provide investment advice. You should consider your own financial situation, particular needs and investment objectives before acting on any of the information available at

Testimonials are provided by third parties for information purposes only and are not intended, and should not be taken to be financial product advice. Please refer to “Terms of Use”, “Important Information”, Terms and Conditions and The Privacy Policy Guide for StockDoctor, BellDirect and Prime for more information.

Contact details:
Phone: 03 8825 4745

A unique and personal service approach to support all your business advisory and personal wealth management needs.

wealth strategies