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Ask an Adviser - Binding and Non Binding Super Beneficiaries

Q&A Superannuation, Estate Planning 26 Oct 2017

In nominating my super beneficiaries, what is a 'binding' vs 'non-binding' nomination and why do some expire after 3 years and some do not? Will my 2 (adult) children have to pay tax on the money from my super fund or any other money left to them in my will.

2 Answers

Vote Answer

3

The key difference between a ‘binding’ nomination and a ‘non-binding’ nomination is certainty. Certainty that your super funds will end up with the person or people you want to benefit. Upon your passing, your super fund is required to pay your benefits in the fund in accordance with the payment standards and governing rules of the fund. Who the benefits are paid to is ultimately a decision for the trustees of the fund.

By lodging a non-binding nomination with your super fund, you provide the trustees with guidance as to who you would prefer your death benefit be paid to. However, the trustee does not have to pay your death benefit to your preferred beneficiary. They are able to consider all relevant circumstances when deciding whom the benefit should be payable to.

By lodging a binding nomination with your super fund, the trustees of the fund no longer have discretion and must pay your death benefit to your chosen beneficiaries, so long as the nomination is valid. A valid nomination must be signed and dated by the super fund member, witnessed by 2 individuals who are not nominated as beneficiaries, specify the proportion of the benefit to be paid to each beneficiary and the nomination must be sufficiently clear and unambiguous for the trustees to act. Beneficiaries nominated via a binding nomination must be either dependents or the legal personal representative (estate) of the super fund member. A binding nomination must be reviewed every 3 years to ensure the nomination remains aligned with the super fund member’s wishes.

A third option that is available with some super funds is a non-lapsing nomination. A non-lapsing nomination ensures the super fund trustees must pay your death benefit to your preferred beneficiaries, in much the same way as a binding nomination except, as the name suggests, a non-lapsing nomination does not have the requirement to be reviewed every 3 years. Care must therefore be taken to ensure this type of nomination is regularly reviewed especially when personal circumstances or the wishes of the super fund member change. 

Whether or not tax is payable on the payment of a death benefit from a super fund depends on if the beneficiary is a dependent for tax purposes.

Dependents for tax purposes include a spouse, former spouse, child under age 18 or a child over age 18, if they are financially dependent upon the deceased.

If a beneficiary is a dependent, no tax is payable by the beneficiary on the total benefit. If a beneficiary is not a dependent, tax will be payable on a portion of the benefit (usually 15% plus 2% Medicare Levy on the taxable component of the benefit).

Usually tax is not payable by a beneficiary receiving other assets such as bank accounts, investment accounts, property etc. no matter whom the beneficiary is. However, should the beneficiary have a preference for receiving cash and therefore choose to sell an inherited asset, capital gains tax may be payable by either the beneficiary or the estate, reducing the benefit received.

General Advice Disclaimer
Note: This advice is of a general nature only and does not take into account your personal situation and all of your objectives, your financial situation or needs. Before making any decisions you should seek advice from a professional, qualified financial adviser.
Helga Baxter
Helga Baxter Crosby Dalwood Pty Ltd

Adv Rating 91% Cust Rating 94.64% Reviews 7

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Vote Answer

0

Hi Kellie, 

These are good questions.

Binding means there will be no trustee intervention, your nomination will be adhered to as long as it is a valid nomination. Non-Binding means the trustee can override your nomination. Most product providers have improved their offerings over the last few years and most offer non-lapsing binding nominations at no extra cost however some product providers are yet to add this to their offer and still only have lapsing (e.g. expire after 3 years) beneficiary nominations.

Assuming your adult children are not dependent, taxation of super benefits is determined by the tax status of the funds making up your Super balance. Within your balance you will have a tax free component and a taxable component. You would be able to see this on your statement. Tax free component is primarily made up of non-concessional contributions, taxable component is everything else, SG, Salary sacrifice and earnings.

The tax free component would be received tax free by your adult children, the taxable component would be taxed at their marginal tax rate or 17%, whichever is lower

General Advice Disclaimer
Note: This advice is of a general nature only and does not take into account your personal situation and all of your objectives, your financial situation or needs. Before making any decisions you should seek advice from a professional, qualified financial adviser.
Tom Davis
Tom Davis MLC Advice Nundah

Adv Rating 100% Cust Rating 98.21% Reviews 49

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