When a member dies, that member's benefits must be cashed and paid to the beneficiaries or legal personal representative as soon as practicable.
For dependant beneficiaries, superannuation death benefits can be cashed:
For non-dependant beneficiaries or legal personal representatives, the superannuation death benefits must be cashed as a superannuation lump sum that is paid out of the superannuation system.
A dependant beneficiary includes:
From 1 July 2017, where the superannuation death benefits is cashed as death benefit income stream to a dependant beneficiary (excluding child recipients), the capital value of the income stream counts towards the transfer balance cap.
Reversionary and non-reversionary income stream
A superannuation income stream cease when the member dies. Where the dependant beneficiary becomes entitled to the death benefits, and is cashed as a death benefits income stream, it is the creation of a new superannuation income stream. The capital value of the income stream at the time the dependant becomes entitled to be paid the income stream will count towards the Transfer Balance Cap of the dependant beneficiary.
A reversionary income stream reverts to the reversionary beneficiary automatically upon the member's death. The income stream does not cease, and is passed from the deceased member to the dependant beneficiary. The capital value of the income stream at the date of death will count towards the transfer balance cap of the dependant beneficiary, 12 months after the date of death.
Can death benefits be retained in the superannuation fund?
Superannuation death benefits can only be retained in the superannuation fund if it is paid as an income stream. It cannot be retained in the superannuation fund as 'accumulation' assets. Where the dependant beneficiary has exhausted his or her transfer balance cap or the unused cap amount is not sufficient, he or she may commute some or all of his or her existing income stream.
A reversionary income stream does not in itself allow for preservation of benefits in the superannuation fund if the capital value will cause the dependant beneficiary to exceed his or her transfer balance cap. However, as the point in time the credit arises in the transfer balance cap is 12 months from of death, the dependant beneficiary has the opportunity to commute his or her own income stream thereby causing a debit to the transfer balance cap.
For a non-reversionary income stream, the point in time the credit arises in the transfer balance cap is when the dependant beneficiary becomes entitled to the death benefits. The dependant beneficiary becomes entitled to the death benefits 'as soon as practicable'.
The ATO published LCG 2017/3, which therein provided the following examples to provide some context:
An example of reversionary:
"Theodor commenced a superannuation income stream on 1 October 2017. The rules of the superannuation income stream allow for it to revert to a dependant beneficiary. Theodor dies on 1 January 2018. Valerie is Theodor's spouse and is the reversionary beneficiary of this superannuation income stream.
As Valerie is a reversionary beneficiary, the 'starting day' of the reversionary death benefit income stream is the date of Theodor's death (1 January 2018).
The value of the superannuation interest that supports the reversionary death benefit income stream on 1 January 2018 is $1,000,000.
A transfer balance credit arises 12 months from this date (1 January 2019) in Valerie's transfer balance account.
The transfer balance credit is equal to the value of the superannuation interest that supports the reversionary death benefit income stream on the 'starting day' ($1,000,000) and not the value of the superannuation interest when the transfer balance credit arises (1 January 2019)."
An example of non-reversionary:
"Nathaniel commenced a pension worth $1,400,000 on 1 October 2017. The rules of the pension do not provide that it may revert to another person on Nathaniel's death. Nathaniel dies on 1 January 2018.
At the time of Nathaniel's death, the value of the superannuation interest supporting the pension is $1,300,000. Nathaniel had no other superannuation interests.
Malena is Nathaniel's spouse and the only beneficiary. On 15 June 2018 she becomes entitled to all of Nathaniel's remaining superannuation interest, to be paid as a death benefit income stream.
During the period between Nathaniel's death (1 January 2018) and when Malena becomes entitled to be paid the death benefit income stream (15 June 2018), $1,000 of investment earnings accrued to the superannuation interest bringing its value to $1,301,000. The value of the superannuation interest supporting the death benefit income stream on 15 June 2018 is $1,301,000.
A transfer balance credit arises in Malena's transfer balance account on 15 June 2018 in respect of the death benefit income stream equal to the value of the superannuation interest that supports the death benefit income stream on 15 June 2018 ($1,301,000)."
Worked example
Scenerio 1
Malena's transfer balance account balance is $1,600,000 in credit, i.e. she has used all her transfer balance cap and have no available cap space. On 15 June 2018, the capital value of Malena's retireement phase income stream was $1,320,000. She has no other superannuation interest.
To receive Nathaniel's death benefit income stream, Malena will need to create space in her transfer balance account. She does this by partially commuting her existing income stream for the amount equivalent to th death benefit income stream.
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Malena's superannuation account balance:
Scenerio 2
Assume same as scenerio 1, except Malena's retirement phase income stream on 15 June 2018 was $900,000. Upon full commutation of the retirement phase income stream, Malena can elect $900,000 of the death benefits to be paid as an income stream, and remainder must be paid as lump sum.
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Malena's superannuation account balance:
Lump sum death benefits of $401,000 was paid to Malena.
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