---
title: "Is defacto inheritance tax hiding in your Super payout? - Sapience Financial"
description: "Learn about the implications of super death payment tax on adult children inheriting superannuation. Understand the tax complexities and potential financial strategies to mitigate the impact."
url: "https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout"
date: "2026-05-26T12:32:29+00:00"
language: "en-GB"
---

#  Is defacto inheritance tax hiding in your Super payout?

- ⚖️ Estate Law & Succession Planning
- [ nominated benificiary ](https://mail.sapience.com.au/beneficiary)
- [ binding death nominations ](https://mail.sapience.com.au/all-tags/binding-death-nominations)
- [ inheritance management ](https://mail.sapience.com.au/all-tags/inheritance-management)
- [ 🏠 Wealth Builders & Home Finance ](https://mail.sapience.com.au/insights/wealth-builders-home-finance)

  ![carnival clown games](https://mail.sapience.com.au/images/blog/defacto-inheritance-tax-hiding-in-your-super-payout-sapience-financial.jpg) If you are thinking of leaving your super as part of an inheritance, think about if you need to leave the tax part too. Reading Time: 6 minutes

---

### When is an inheritance tax not called inheritance tax?

When it's a super death payment tax of course!

Like to know more? Well, you should because this tax problem has special meaning for people with super, and adult children of people with super.

If you plan on leaving your superannuation to your now adult kids when you pass away, there's a strong possibility your super death benefit payout will be hit with tax.

This is even though you could have received that same benefit in your own hands tax-free when you're over 60.

#### *Read in this article*

 - [Unfair you might say?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#unfair-you-might-say)

- [Sounds confusing?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#sounds-confusing)
- [Why does this happen?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#why-does-this-happen)

- [Tips for Super Fund members](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#tips-for-super-fund-members)
- [What should you do, now you know this?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#what-should-you-do-now-you-know-this)

- [Frequently Asked Questions: Super Death Tax & Adult Children](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#frequently-asked-questions-super-death-tax-adult-children)

    - [Is there an inheritance tax on superannuation in Australia?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#is-there-an-inheritance-tax-on-superannuation-in-australia)

    - [Why is my adult child considered a 'tax-non-dependant'?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#why-is-my-adult-child-considered-a-tax-non-dependant)

    - [How much tax will my children pay on my $500,000 super balance?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#how-much-tax-will-my-children-pay-on-my-500-000-super-balance)

    - [Can I reduce the tax my adult children pay on my super?](https://mail.sapience.com.au/blog/defacto-inheritance-tax-hiding-in-your-super-payout#can-i-reduce-the-tax-my-adult-children-pay-on-my-super)

### Unfair you might say?

A lot of people say that and we'd agree.

The law can sound confusing as Super laws and Tax laws seem to overlap in this important area.

- A financially independent adult child is considered a **super-dependant** under the super laws.
- But at the same time is considered a **tax-non-dependant** under the tax laws.

This means, that a financially independent adult child of the recently departed, while they can legally receive the death benefit payout from the decease's super fund, will be required to pay tax on the amount.

**Tax Insights**: The tax treatment of death benefit lump sum payments from super funds disadvantages non-dependants such as adult children. Adult children can find themselves paying between 17% and 32% tax on a lump sum payment received from a parent’s super fund.

### Sounds confusing?

Simply put it means this:

- If any of your kids are now aged 18 or over and can’t prove they're financially dependent upon you (or severely disabled) to the satisfaction of the Super Funds’ Trustee, then they're considered **tax-non-dependents** under the tax laws.

As a result, the tax will be withheld by the Super fund Trustee on any super death amount they receive.

**Caution**: If the super death payout comes directly from a Super fund to the deceased's estate, the estate's Executor looking after the Will is required to calculate and pay the tax. This is a potential minefield, so get financial advice.

### Why does this happen?

The amount of tax to be paid by a **tax-non-dependant** adult child is determined by a number of issues including whether the funds coming out of the deceased's super account were classified as from a taxable component of the funds.

While this is beyond the scope of this article, this is an important area where we can provide advice and strategy to reduce the tax being paid.

### Tips for Super Fund members

- Understand if your super death benefit is paid as a lump sum payment to a person who's classed as a **tax-dependant**, then the **benefit is tax-free**.
- Understand if it's paid to a **tax-non-dependant,** **tax is payable** from the taxable component at a rate of 15% (plus Medicare levy) up to 32% if the taxable component contains an untaxed element.
- So allow for the potential tax effect in your future plans.

**Case Study**: Terry had a typical super fund account and nominated his two kids to receive the balance of his super fund upon his death. When he first opened the fund, they were both under 18.

Both his kids are now adults 35 and 37 and living independently.

- Terry died and left $500,000 in his super (taxable component) and it was paid to his two now adult children.
- This means his kids are now adults and considered **tax-non-dependants**.
- Upon Terry's death, his super balance was $500,000.
- His death benefit payout was reduced to $415,000 and split between his two children
- The **tax office collected 17%** of the total benefit - $85,000.

This was because Terry's children are now adults and considered **tax-non-dependants** to Terry.

If Terry had additional life insurance in his super as well, then the insurance payout can be taxed at 32% (30% benefit tax plus 2% Medicare levy).

### What should you do, now you know this?

If you plan on leaving your superannuation to your kids when you pass away, understand when tax on a super death benefit payout becomes an issue.

If you’re also paying for life insurance from your super fund, understand the effect of children turning 18 years and becoming no longer financially dependent, has on your future estate plans.

- If your **kids are under 18**, speak with us about when you should increase your life insurance by 30% to cover taxes later
- If your **kids are now 18 or over**, speak with us about either increasing your insurance by 30% to cover the tax or use a special financial strategy to manage this unfair taxation issue.
- If **you're the adult child of a parent who is planning on leaving you** the unused portion of their super as part of an inheritance, understand a financial strategy might be able to reduce that tax to nil.

### Frequently Asked Questions: Super Death Tax & Adult Children

#### Is there an inheritance tax on superannuation in Australia?

Technically, no; however, the **Superannuation Death Benefits Tax** acts as a de facto inheritance tax. If your super is paid to a "tax-non-dependant" (like a financially independent adult child), the ATO collects **17% to 32%** of the taxable component, which can amount to tens of thousands of dollars.

#### Why is my adult child considered a 'tax-non-dependant'?

Under tax law, once a child turns 18 and is no longer financially reliant on you, they lose their tax-exempt status for super payouts. While they can still legally receive the money, they are no longer entitled to receive it **tax-free**, unlike a spouse or a minor child.

#### How much tax will my children pay on my $500,000 super balance?

Using a standard 17% rate (15% tax + 2% Medicare), a $500,000 taxable component payout would result in an **$85,000 tax bill**. If the balance includes an "untaxed element" (often found in certain life insurance payouts), that tax can climb to 32%, or $160,000.

#### Can I reduce the tax my adult children pay on my super?

Yes. Through strategic planning—such as **re-contribution strategies** or withdrawing super tax-free after age 60 to gift it during your lifetime—you can often reduce the taxable component of your super to zero. This ensures your children receive 100% of their inheritance.

*Disclaimer: Superannuation and tax laws are complex and subject to change. This information is general in nature. For a de-facto tax audit of your estate, we recommend a [confidential consultation](https://mail.sapience.com.au/contact).*

**Do we sound like the type of people you'd like to do business with?**
 Call us today on 1300 137 403 or email us [here](https://mail.sapience.com.au/index.php?Itemid=704) for a no-obligation private chat about your situation.

---

![author pic drew browne](https://mail.sapience.com.au/images/author-pic/contact-drew-browne-advisor-sapience-financial.jpg)**Drew Browne** is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog [here](https://mail.sapience.com.au/index.php?Itemid=1267). You can connect with him on [LinkedIn](https://www.linkedin.com/in/drewbrowne/).  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.

![Written by Human Not made by AI sapience financial ](https://mail.sapience.com.au/images/icons/not-made-by-AI-sapience-financial-black.png)

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