Securing Your Super: A Guide to Beneficiary Nominations and Tax

For most Australians, superannuation is one of their largest assets, often second only to the family home. A common and costly mistake is assuming this wealth automatically forms part of your Will. It doesn’t.

Your super is held in a trust, and the fund’s trustee (the company that manages your super) is legally bound to distribute your money according to superannuation law, as such funds can bypass your estate with a valid beneficiary nomination. This article explains how to control where your super goes after you’re gone and the critical tax implications for those you leave behind.

The Two Worlds of “Dependants”

Before we begin, it’s crucial to understand a key legal distinction. Superannuation law has two different definitions for “dependant”:

Dependant (Superannuation Law): This defines who you are legally allowed to nominate to receive your super.
- Your spouse (including de facto and same-sex partners).
- Your children (of any age, including step-children or adopted children).
- A person in an interdependent relationship with you.
- A person who was financially dependent on you at the time of your death.
- Your Legal Personal Representative (LPR), which is the executor of your Will/administrator of your Estate.

Dependant (Tax Law): This defines who receives your super death benefit tax-free. This list is much narrower.
- Your spouse (as defined above).
- Your minor children (under 18).
- A person in an interdependent relationship with you.
- A person who was financially dependent on you.

The most important takeaway is this: An independent adult child (over 18) is a “dependant” under super law, but NOT a “dependant” under tax law. This difference has major financial consequences. In this case a portion of the benefit is likely to be taxable.

Part 1: The Types of Nominations

You have two main ways to tell your super fund who you want your money to go to.

1. Non-Binding Death Benefit Nomination

This is the most common and basic type of nomination.

What it is: A non-binding nomination is essentially a suggestion or a “wish list” for the trustee. You are guiding the trustee, but you are not directing them.
Who has the final say? The super fund trustee. When you die, the trustee will look at your nomination, but they will also conduct their own search for all potential dependants (spouses, children, etc.). They have the final discretion to decide who gets the money and in what proportions, as long as they pay it to a valid “dependant” under superannuation law or your estate.
Pros: It’s flexible. If your circumstances change (e.g., you have another child) and you forget to update your form, the trustee can take the new child into account.
Cons: Uncertainty. The trustee’s final decision may not match your wishes, which can lead to disputes, especially in complex families (e.g., blended families or estranged children).

2. Binding Death Benefit Nomination (BDBN)

This is a formal, legal direction to the trustee.

What it is: A BDBN forces the trustee to pay your super to the specific people you have nominated in the exact proportions you have set. The trustee has no discretion.
Who has the final say? You do.
Pros: Certainty. You know exactly where your money is going, which provides peace of mind and can prevent family disputes.
Cons: It’s rigid. If your circumstances change and you don’t update your BDBN, it could lead to an unintended outcome (e.g., an ex-spouse receiving your super if you forgot to change it after a divorce).

BDBNs themselves come in two forms:

Lapsing BDBN: This is the standard form. It is only valid for three years from the date you sign it. If it expires, it reverts to being a non-binding nomination.
Non-Lapsing BDBN: This nomination does not expire. It remains valid until you actively change or revoke it. These are less common with large super funds but are the standard for Self-Managed Super Funds (SMSFs).

Part 2: What Makes a Nomination Valid?

For a Binding Death Benefit Nomination to be legally enforceable, it must be perfect. If it has any errors, the trustee will declare it invalid, and it will be treated as a non-binding nomination (meaning the trustee regains discretion).

The rules for a valid BDBN are strict:

It must be in writing on the specific form provided by your super fund.
You must nominate one or more valid “dependants” (under superannuation law) or your Legal Personal Representative (your estate).
The proportions must be clearly stated and must add up to exactly 100%.
It must be signed and dated by you (the member).
It must be witnessed by two people who are both over the age of 18 and are not nominated as beneficiaries on the form.
The witnesses must sign and date the form on the same day that you do.

Any deviation from these rules, eg. a witness who is also a beneficiary, different dates, or proportions that don’t add up, can invalidate the entire nomination.

Part 3: Tax Implications – The Scenarios

This is where planning becomes critical. The tax treatment of your super depends entirely on who receives it.

Your super balance is made up of two parts: a tax-free component (from any after-tax contributions you made) and a taxable component (from employer contributions and investment earnings).

The tax-free component is always paid tax-free to everyone.
The taxable component is what we need to watch.

Scenario 1: Payment to a ‘Tax Dependant’ (e.g., Spouse, Minor Child)

This is the simplest and best outcome.

Tax Payable: $0
When a “tax dependant” receives a super death benefit, the entire amount, both the tax-free and taxable components, is paid to them completely tax-free. This applies whether they take it as a lump sum or as an income stream (pension).

Scenario 2: Payment to a ‘Non-Tax Dependant’ (e.g., Independent Adult Child)

This is the major trap. As explained earlier, an adult child who is not financially dependent on you is a “non-tax dependant.”

Tax Payable: Yes, on the taxable component.
If they receive the death benefit as a lump sum:
- The tax-free component is received tax-free.
- The taxable component (taxed element) is taxed at a maximum rate of 15% plus the 2% Medicare Levy, for a total of 17%.
- (If the super fund was “untaxed,” this rate is 30% + 2% Medicare, but this is less common).

Example:

You leave your $500,000 super balance to your adult son.
Your balance is $100,000 tax-free and $400,000 taxable.
He receives the $100,000 tax-free.
He must pay 17% tax on the $400,000 taxable component.
Tax bill: $68,000. Your son receives $432,000, not $500,000.

Scenario 3: Payment to Your Legal Personal Representative (Your Estate)

This is a common and often smart estate planning strategy. If you make a BDBN to your “Legal Personal Representative,” your super is paid into your estate and is then distributed according to the instructions in your Will.

Tax Payable: It depends on who the beneficiaries are in your Will.
If your Will says the money goes to a tax dependant (e.g., your spouse), the estate pays no tax.
If your Will says the money goes to a non-tax dependant (e.g., your adult child), the estate pays the tax on the taxable component before distributing the money.

The Key Difference: When the estate pays the tax (on behalf of an adult child beneficiary), the tax rate is 15%, and the 2% Medicare Levy does not apply (save 2%).

In the example above, if the $500,000 went to the estate first and then to your adult son, the tax bill would be $60,000 (15% of $400,000), saving your son $8,000.

Part 4: Other Important Scenarios

What if I have no nomination?

If you have no nomination, or your BDBN is invalid, the trustee has full discretion. They will try to find a “dependant” under super law (spouse, child, etc.) and pay them directly. If they cannot find any dependants, they will pay the money to your estate.

Reversionary Pension

If you have already retired and are receiving an account-based pension, you may have another option. A “reversionary pension” automatically transfers your pension to your nominated beneficiary (almost always a spouse) upon your death. They simply continue receiving your pension payments.

Pros: It is automatic and bypasses the entire lump sum/nomination process. For a spouse, the payments remain 100% tax-free.
Cons: It can generally only be paid to a “tax dependant” who is also eligible to receive a pension (like a spouse). You cannot make it “reversionary” to an independent adult child.

Conclusion: Your Action Plan

Your superannuation is too valuable to be left to chance. The decisions you make (or don’t make) about your beneficiaries can have a tax-free or very expensive outcome for your family.

Check Your Current Nomination: Log in to your super fund’s website today. Do you have a nomination? Is it binding or non-binding? Is it who you still want it to be?
Review the Validity: If you have a BDBN, when did you sign it? If it was more than three years ago, it has likely expired and is now non-binding.
Consider Your Beneficiaries: Are they tax dependants (spouse, minor child) or non-tax dependants (adult children)?
Seek Professional Advice: The interplay between superannuation law, tax law, and your personal Will is complex. Speaking to a qualified financial advisor and an estate planning lawyer is essential to ensure your wealth is distributed in the most effective and tax-efficient way possible.

Do not assume your Will covers your super. Take control by making a valid nomination that reflects your wishes.