A superannuation proceeds trust is a type of testamentary trust, set up by your Will, that holds superannuation death benefits paid into your estate. It exists to stop tax being charged on benefits that would otherwise have passed tax free. It does that by limiting who can benefit from the trust to the people who can receive your super tax free.
Why would you need a superannuation proceeds trust?
The problem it solves is that an ordinary testamentary trust can trigger tax on superannuation even where the money is destined for someone who would have received it tax free.
Not everyone can receive your superannuation death benefits tax free. Where your benefits are paid to your executor and then into a standard testamentary trust in your Will, the class of people who could potentially benefit from that trust includes people who would have paid tax had they received the benefits directly from your fund. The mere possibility that they could benefit is enough to trigger the tax.
It makes no difference that your trustee intends to use the money for someone else. The tax follows the class of potential beneficiaries rather than the trustee’s intentions, which is why a narrower trust is needed.
Who can receive superannuation tax free?
Only a limited group can receive your superannuation death benefits tax free. The Commonwealth tax legislation calls them your death benefits dependants. There are four categories:
- your spouse or former spouse;
- your child aged under 18;
- someone you were in an interdependency relationship with just before you died; and
- anyone else who was a dependant of yours just before you died, which in practice means financially dependent on you.
That last category has no age limit, so a financially dependent adult child of any age qualifies.
Whether someone can be paid your super tax free is tested at the date of your death, so it doesn’t change afterwards if your circumstances or theirs do.
This list isn’t the same as the list of people you may nominate in a binding death benefit nomination. A former spouse can receive your super tax free but cannot be nominated in a BDBN. Whether someone may receive your benefits and whether they receive them tax free are two different questions with two different tests.
How does a superannuation proceeds trust work?
A superannuation proceeds trust is an optional testamentary trust included in your Will. Your executor decides after you die whether to use it. If nobody who could receive your superannuation tax free is alive at your death, the trust simply isn’t used.
The only difference from a standard testamentary trust is the range of people who can benefit. Everything else about it works the same way, including the tax treatment of the income it earns. That means your beneficiaries under 18 are taxed as adults on income from the trust rather than at penalty rates, so each can receive a meaningful amount of that income tax free every year.
| Who can benefit from an ordinary testamentary trust | Who can benefit from a superannuation proceeds trust |
|---|---|
| Primary beneficiaries your spouse your children your grandchildren your great grandchildren | your spouse your former spouse your children under 18 a financial dependant of any age someone you were in an interdependency relationship with |
| Secondary beneficiaries your siblings, parents and grandparents your nieces, nephews, aunts, uncles and cousins | |
| Tertiary beneficiaries related trusts and companies charities |
Everyone in the right hand column can receive your superannuation tax free. Almost nobody in the secondary or tertiary rows on the left can, which is what triggers the tax.
When is a superannuation proceeds trust useful?
A superannuation proceeds trust is worth including where your superannuation is likely to end up in your estate and there are people who could receive it tax free. In practice that means:
- your Will includes one or more testamentary trusts;
- your superannuation will be paid from your fund to the executor of your estate, either because you nominated your legal personal representative or because the trustee decided to pay your estate; and
- you have a spouse, children under 18 or other financial dependants who could receive your superannuation tax free at the date of your death.
It is most commonly used where you have a spouse or young children. Because it is optional, including one costs you nothing if the circumstances at your death mean it isn’t needed.
Frequently asked questions
Do you need a superannuation proceeds trust if your super is paid directly to your family?
No. Benefits paid straight from your fund to an eligible person under a binding nomination never reach your estate, so the trust has nothing to hold. It only matters where the benefits come into your estate.
Is a superannuation proceeds trust a separate trust from your other testamentary trusts?
Yes. It sits alongside them in your Will and holds only the superannuation, because mixing the superannuation into a wider trust is the thing that causes the tax.
Can you set one up now?
No. Like any testamentary trust it is created by your Will and starts only when you die, so it has to be in your Will before then.
Talk to us about your superannuation and your Will together
Whether a superannuation proceeds trust helps depends on where your superannuation will end up and who is likely to survive you, so it is a question about your whole estate plan rather than your Will alone. Call the Wills team on (08) 9220 4433 or book an estate planning consultation.
Related: testamentary trusts, how they work and who needs one and what happens to your superannuation when you die?
This article contains general information about superannuation proceeds trusts. It is not legal advice. You should obtain professional legal, taxation and financial advice about your estate planning.
