You have spent thirty or forty years building your super. You have paid the contributions tax, ridden out a couple of market crashes, and watched the balance slowly turn into something that looks like a life's work. Somewhere along the way you assumed that whatever is left when you go will simply pass to your children.
Then someone at a barbecue mentions there is tax on it. And you think: hang on, we do not have death duties in Australia.
They are both right. It is one of the most common surprises in Australian estate planning, and it is worth understanding properly - not because it should frighten you, but because it is one of the few money problems you can still do something about while you are alive and well.
Australia has no death duties. Super is the exception
Australia abolished death duties across the late 1970s and early 1980s. There is no inheritance tax here. If you leave your house, your bank account or your share portfolio to your children, no tax is triggered simply because you died.
Superannuation is different. It sits outside your estate, it is governed by super law rather than your will, and when it is paid to the wrong sort of beneficiary, part of it is taxed. There is no official “death tax” - the Australian Taxation Office (ATO) calls it tax on superannuation death benefits - but the nickname has stuck because that is exactly how it feels to the family receiving the cheque.
Why your adult children are not “dependants”
Everything turns on one word: dependant.
For tax purposes, a death benefits dependant is your spouse or former spouse, a child of yours under 18, someone who was genuinely financially dependent on you, or someone in an interdependency relationship with you. If your super goes to a person on that list, the lump sum is tax-free. Your husband or wife receives the whole amount, untouched.
Your 34-year-old daughter with her own job and her own mortgage is not on that list. Under super law she is still your child and can receive the money. Under tax law she is a non-dependant, and part of what she receives is taxable.
That is the gap most families never see coming. The people we most expect to leave our super to are usually the people the tax rules treat least kindly.
How much tax, and on what
Your super balance is made up of two components, and your fund can tell you the split in about five minutes on the phone.
The tax-free component comes mainly from contributions you made out of your own after-tax money. It passes to anyone, dependant or not, without a cent of tax.
The taxable component is everything else - employer contributions, salary sacrifice, personal contributions you claimed a deduction for, and all the investment earnings on top. For most people it is the large majority of the balance.
When a lump sum goes to a non-dependant, the ATO taxes the taxable component at 15%, plus the 2% Medicare levy - 17% in total - where it is paid directly to the person. Where the benefit is paid through your estate to the same person, the Medicare levy does not apply, so the rate is 15%.
There is also an untaxed element, which most often appears when life insurance held inside super is paid out. That is taxed at 30% plus the Medicare levy where paid directly - 32%.
Put some numbers on it. Suppose you leave $400,000 of super to your adult son, and your fund tells you 80% of it is taxable component. That is $320,000 taxed at 17%, which is about $54,400 in tax. The remaining $80,000 of tax-free component reaches him in full. He still inherits well over $340,000 - but $54,400 is a new car, or a very large dent in a deposit, and it went nowhere near him.
What you can actually do about it
The good news is that this is a planning problem, not a trap. Four things are worth looking at.
Check your nomination is valid and current. Before you worry about tax, make sure the money goes where you intend at all. A binding death benefit nomination usually lapses after three years unless your fund offers a non-lapsing version. A lapsed or invalid nomination hands the decision to the fund trustee, which is how families end up in disputes that cost far more than the tax.
Understand what a spouse changes. Super left to a spouse is tax-free, and can often be taken as an income stream rather than a lump sum. For most couples the tax question only really arrives on the second death, which is when the children inherit. That is the moment worth planning for, not the first.
Look at a re-contribution strategy. If you are over 60 and have met a condition of release, you can withdraw part of your super tax-free and put it straight back in as a non-concessional (after-tax) contribution. The money comes out of the taxable component and goes back as tax-free component. In 2026-27 the non-concessional cap is $130,000 a year, and if you are under 75 and your total super balance allows it, you may be able to bring forward three years and contribute up to $390,000 at once. There are limits: if your total super balance at 30 June was at or above the general transfer balance cap ($2 million from 1 July 2025), your non-concessional cap is nil. Done steadily across a few years, this can shift a large share of a balance into the tax-free column.
Review insurance held inside super. Cover inside super made good sense while you had a mortgage and children at home. In your 60s it may be creating an untaxed element taxed at 32% in the hands of your kids, while quietly eating your balance in premiums. Worth a look, not necessarily a cancellation.
If you are reading this and feeling behind
Start with the smallest step. Ring your super fund and ask two questions: what is my tax-free and taxable split, and what beneficiary nomination do you currently have on file? Most people cannot answer either, and both answers are free.
Keep a sense of proportion, too. The tax applies only to the taxable component, only when the money goes to a non-dependant, and often works out smaller than the number people imagine. Super remains one of the most tax-effective places to hold money while you are alive, and it is a poor idea to wreck a good retirement plan chasing a tax your family may pay decades from now.
A couple of things to watch. The rules here have been stable for years, but super rules in general change often - the new Division 296 tax on very large balances, which applies from 1 July 2026 to amounts above $3 million, is a separate measure and not this one. And timing matters: a re-contribution strategy needs you to be eligible and well enough to act, which is an argument for looking at it in your early 60s rather than your late 70s.
Noel Whittaker has written about this for years for one simple reason. Almost nobody discovers it in time, and almost everybody could have done something about it.
If you want the whole picture - wills, binding nominations, the tax on super death benefits, testamentary trusts and how they fit together - Wills, Death & Taxes Made Simple walks through it in plain English. It is $22.95, you buy direct from the author, and you get both PDF and EPUB formats to read on any device.
This article is general information only and doesn't take account of your personal circumstances. Figures are current at time of writing and change each financial year. Consider seeking advice before acting.