posted in: Building Wealth

How to avoid death tax on superannuation & maximise your superannuation benefits

When it comes to securing your financial future, having the right strategy in place can make all the difference.

At Montara Wealth, we take a holistic, strategic approach to financial planning, helping individuals, families, and businesses build wealth and protect their assets.

As a privately owned advisory, we’re not tied to any bank or financial institution—which means our only priority is finding the best solutions for you.

From investment and superannuation to tax and estate planning, we work with our clients to develop tailored financial plans that support both short and long-term goals.

When it comes to superannuation in Australia, many of our clients are caught off guard by something known as the “death tax.”

Many don’t realise that, in certain cases, their super balance could be taxed when passed on to beneficiaries.

However, with careful planning, it’s possible to minimise or even avoid this tax altogether.

Here’s what you need to know about protecting your superannuation fund for the next generation.

If you’re unsure where to start, it’s worth speaking with a financial advisor in Sydney who understands the local regulations and can guide you through the best options for your situation.

Understanding superannuation in Australia

What is superannuation?

Australian superannuation is the money your employer sets aside throughout your working life to support your retirement.

This money is invested in a number of assets with the aim to grow your wealth, giving you the best possible fund for your retirement.

When you start working, your employer will contribute 11.5% of your pre-tax income to your super account—this is the Superannuation Guarantee, and it was introduced by the Australian government in 1992 as part of economic reforms to ensure employees retired with savings.

When it was first introduced, the contribution stood at only 3%. Over time, this amount has increased.

Today, superannuation is a core component of Australian retirement.

Knowing how to get the most out of your superannuation is essential, and it can make a big difference to how well you live once you clock out of work for good.

Managing your superannuation fund

It’s easy to underestimate the importance of choosing and contributing to a superfund, especially when you’re young and retirement feels a long way off, but small decisions today can have a big impact on your future.

Choosing the best superannuation Australia

When choosing an Australian superannuation fund, you should consider :

• Fees, which can significantly impact long-term returns
• Investment options, ensuring the fund aligns with your risk tolerance and goals
• Performance history, as consistent returns matter more than short-term gains
• Insurance coverage, which many super funds offer
• Member benefits, like financial advice or additional services

If you have multiple funds, you should look into how to combine superannuation, and if funds are missing, then you should look into how to track lost superannuation as soon as possible.

How to contribute to your super fund

In addition to the compulsory contributions made by your employer (which normally sit at 11.5% of your pre-tax salary), you can make voluntary contributions.

You won’t pay tax personally on these contributions up to $30,000 per year but your superannuation fund will pay 15% on what it receives.

Investment options for your superannuation

Your super fund takes your contributions and typically invests them in assets like shares, property, bonds, cash, and infrastructure, with the goal to make your money work for you and generate returns.

Accessing your superannuation benefits

You can usually tap into your superannuation once you turn 65, or earlier if you’ve reached your preservation age (which is between 55 and 60 depending on when you were born) and you’ve fully retired. 

Once you meet these conditions, you generally have full access to your super and can choose to take it as a lump sum, income stream, or a mix of both.

That said, there are situations where you might be able to access part of your super early.

For example,
If you’re experiencing severe financial hardship and you’ve been receiving eligible government income support payments for at least 26 continuous weeks, you can apply for a partial release.

The amount is limited (usually between $1,000 and $10,000 in a 12-month period), and your super fund must approve the request.

Similarly, under compassionate grounds, you may be able to access some super to pay for things like medical treatment, funeral costs, or avoiding foreclosure on your home—but this needs to be approved by the ATO.

There are also provisions for temporary or permanent incapacity, and in the case of a terminal illness, you may be able to access your super tax-free.

Superannuation payouts & taxation

Superannuation income streams

This is a regular payment, which may be weekly, monthly, or yearly.

Essentially, you use the funds in your superannuation to pay yourself a salary to provide income in retirement.

Superannuation lump sum payments

This means withdrawing some or all of your super in one go.

If you choose this method, your money will no longer be considered superannuation, and you may not receive concessional tax treatment.

Minimum drawdowns for retirement

Individuals receiving superannuation benefits as a pension are required to withdraw a minimum percentage of their account balance each year, based on their age.

What happens to superannuation after death?

When a superannuation fund member passes away, their super balance doesn’t automatically become part of their estate.

Instead, it is paid out as a superannuation death benefit to their nominated beneficiaries.

Superannuation death benefits include the deceased’s remaining super balance, as well as any life insurance payout linked to their super fund.

This lump sum or pension payment is meant to provide financial support to their dependants or estate.

Who can receive superannuation death benefits?

Death benefits are paid to the nominated beneficiary, but if no valid nomination exists, then the super fund trustee will decide who receives the benefit.

This could be the estate or eligible dependants.

Tax implications of superannuation death benefits

The tax on a death benefit depends on who receives it and how it is paid.

Certain beneficiaries, like a spouse or dependent child, may receive it tax-free, while non-dependants may have to pay tax on the taxable component of the benefit—up to 17% on the taxable portion of the super balance, or more if the benefit includes an untaxed component.

In Australia, non-dependants (which includes adult children) might be obligated to pay tax on superannuation death benefits because super is a tax-advantaged retirement savings system, and is designed to support the individual and their financial dependants.

When a superannuation death benefit is paid to a non-tax-dependant the government applies tax to ensure these funds don’t become a tax-free inheritance.

How to avoid death tax on superannuation

The taxable portion of the super is the part made up of concessional contributions and investment earnings, and this is the part which is subject to the “death tax.”

This tax is paid after the account holder has passed, but only in cases when the super is inherited by someone who isn’t a spouse, minor child, or financial dependant.

If a non-dependant inherits, then the super is taxed at :

• Up to 17% (15% plus Medicare levy) for the taxed component.
• Up to 32% for the untaxed component (from certain government or older super funds).

There are a few ways that this tax can be avoided, including nominating tax-dependant beneficiaries, withdrawing super before death, or converting super into a pension.

Nominating tax-dependent beneficiaries

One of the simplest ways to avoid death tax is to ensure your super is left to a tax-dependent beneficiary, such as a spouse, minor child, or someone who was financially dependent on you.

This ensures they receive the benefit tax-free. For personalised advice tailored to your situation, consider speaking with a financial planner Sydney.

Using superannuation withdrawal strategies

If you are over your preservation age and can access your super tax-free, withdrawing funds before passing away and gifting them to your beneficiaries can avoid the tax that would otherwise apply if the money remained in super.

However, this should be carefully planned to avoid impacting your estate planning or pension eligibility.

Setting up a reversionary pension

A reversionary pension allows your super pension to continue being paid to a nominated beneficiary after your death, instead of being paid as a lump sum.

This can provide tax advantages, as pensions to a tax-dependant are not taxed.

Transferring super to a spouse

If you have a spouse, transferring your super into their account through contribution splitting or spouse contributions can help ensure the balance remains with a tax-dependent, avoiding tax when it is eventually withdrawn.

Common mistakes to avoid when managing superannuation

• Not making a valid beneficiary nomination

If you don’t nominate beneficiaries correctly, your super fund may decide who receives your benefit.

• Leaving super to non-tax-dependants without planning

This might mean a significant tax bill that could have been avoided.

• Ignoring reversionary pension options

Setting up a reversionary pension can provide ongoing tax-free income rather than a lump sum subject to tax.

• Not reviewing your super regularly

Life changes, and your super strategy should change too. Regularly reviewing your nominations, estate plan, and financial goals ensures your super is managed in the best way possible.

How Montara Wealth can help

When you’re planning your superannuation retirement, there’s a lot to think about.

From choosing a superannuation company, to superannuation claims, and how to find your lost superannuation, retirement planning can be complex.

Quality superannuation advice in Australia can make a big difference.

Planning for what happens to your superannuation after you pass away is an essential part of managing your financial future.

Without careful planning, your beneficiaries—especially non-tax-dependants—could face unnecessary tax obligations.

Montara Wealth can help you develop a plan to minimise tax for your beneficiaries, explore options like a reversionary pension, and ensure your estate planning is structured effectively.

Taking proactive steps now, such as making informed beneficiary nominations and structuring your super effectively, can help ensure your loved ones receive the maximum benefit possible.