Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 81

Does your will treat your super fairly?

It is a common strategy to arrange your life insurance through your super fund. The fund can often buy insurance at wholesale rates, and by using salary sacrifice, you can effectively pay the premiums from pre-tax dollars.

Tax on superannuation paid to a non-dependant

But tax may be payable on the proceeds of the policy if it is left to a non-dependant. Often a young single person has, say, $300,000 of death cover through their work super fund. They are unlikely to have dependants for tax purposes, so if they were killed in a car accident the Tax Office would take around $100,000, leaving around $200,000 in their estate.

Where tax is payable by an estate, the tax becomes a general liability of the estate. As a result things can get much more complicated if the deceased is older and the estate does not have the money to pay the tax.

Think about a single father aged 50 with three adult children who all work, and one of them lives at home with him. His house was worth $380,000 in 2008 when his will was drafted. He has $300,000 in super Fund A, and just $15,000 in super Fund B. There is also a $300,000 insurance policy in Fund B – this fund is paying the premiums because it has the smallest balance.

He wanted his will to treat his children equally. Therefore, it was drafted to give the first child the proceeds of Fund A, the second child the proceeds of Fund B and the residue of his estate to child three who was living at home. The father figured that would be the house and the contents and each child would receive roughly the same amount.

Unfortunately, the will drafter did not understand the effect of the death tax on insurance policies held in superannuation.

When the father died suddenly, the children got a terrible shock when they discovered they were not going to be treated equally at all. Ordinarily it would be thought that the first child would receive around $255,000 as the proceeds from Fund A would be taxed at 15%, while the proceeds of the insurance policy held by Fund B would yield approximately $215,000 after the tax of approximately $100,000 was deducted. Life insurance proceeds held within superannuation suffer a much higher tax than ordinary superannuation benefits because they are treated as ‘untaxed’ and are subject to 30% tax (excluding Medicare levy) when paid to a non-dependant.

Problem 1: Super funds do not deduct the death tax and send the balance to the estate. Rather, they send the entire amount to the estate - it is the estate which has the obligation to send the death tax to the ATO.

Problem 2: Because the will specifically gave "the proceeds of Fund A" to the first child and “the proceeds of Fund B” to the second child, they would be entitled to the whole of $300,000 and $315,000 respectively. The tax still has to be paid, but it won’t be coming out of the proceeds received from either of Fund A or Fund B. The executor of the estate has a responsibility of paying $145,000 to the Tax Office ($45,000 death tax on Fund A and $100,000 death tax on Fund B).

Estate left to pay the tax

Because children one and two have received specific bequests, the tax can only be paid out of the residue of the estate. Using a concept known as ‘marshalling’, the executor will probably have to sell the home to pay the $145,000 tax bill leaving child three with net benefits of only $105,000. Not only has the third child borne the cost of the tax payable on both of the superannuation payouts, but the family home has been sold to pay the tax bill.

It is critical that anyone drafting a will understands that all assets are not treated equally for tax purposes. The difference between CGT-free assets like the family home, and investment properties that carry a CGT liability, are generally well known. But few understand the tax treatment of insurance policies held within superannuation, let alone the different tax treatment of the various components arising from contributions made to superannuation funds. As the above example shows, failure to take this tax into account can have disastrous and unforeseen consequences.


Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His website is


Leave a Comment:



Most estate planning for tax is inadequate

Limits to a will’s power over an SMSF

Providing financial assistance to parents


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Welcome to Firstlinks Edition 424 with weekend update

Wet streets cause rain. The Gell-Mann Amnesia Effect is a name created by writer Michael Crichton after he realised that everything he read or heard in the media was wrong when he had direct personal knowledge or expertise on the subject. He surmised that everything else is probably wrong as well, and financial markets are no exception.

  • 9 September 2021

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.


Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.