Binding Death Benefit Nominations - The Document Most Super Members Get Wrong

When I review the superannuation arrangements of a new client, the death benefit nomination is almost always the first thing I examine. What I find, more often than not, is a nomination that has lapsed, names someone whose relationship with the client has since changed, or was never legally binding in the first place. During someone's lifetime, correcting that takes little more than a form and some time. After they die, the same piece of paperwork can determine whether their family receives what was intended, or whether the fund's trustee steps in and applies its own discretion.

Binding versus non-binding, lapsing versus non-lapsing

A death benefit nomination instructs the trustee of your superannuation fund where your balance should go when you die. Without a valid nomination, or with one that has no legal force, the trustee exercises its own judgment, guided by the fund's rules and the Superannuation Industry (Supervision) Act.

A non-binding nomination is advisory. It records your preference but does not oblige the trustee to follow it. A binding nomination is a legal instruction the trustee must follow, provided it is valid at the time of your death. Most retail and industry funds issue binding nominations that lapse after three years. If not renewed before expiry, the nomination loses its binding character and reverts, in effect, to a non-binding preference, a change that often goes unnoticed until it is too late to matter. Some funds now offer non-lapsing binding nominations, which remain in force until revoked or replaced. Most properly drafted self-managed super fund trust deeds can be structured to allow the same. A non-lapsing nomination requires no periodic renewal; a lapsing one requires active management to remain effective.

Who the super rules count as a dependant

Superannuation law and tax law each carry their own definition of "dependant," and the two do not align. For superannuation purposes, your dependants include your spouse, your children of any age, any person financially dependent on you, and any person in an interdependency relationship with you. An adult child who is entirely financially self-sufficient qualifies under this definition and can receive your superannuation benefit directly from the fund.

Tax law is more restrictive. That same adult child is not a tax dependant unless they are under 18, financially dependent on you, or in an interdependency relationship with you. The tax treatment of a superannuation death benefit turns on which category the recipient falls into, and the practical consequence of that distinction, for most families with adult children, is a tax bill that comes as a considerable surprise.

The tax on super passing to adult children

A superannuation balance is generally composed of two components. The taxable component covers concessional contributions, including employer Superannuation Guarantee contributions and salary sacrifice amounts, together with all investment earnings on the account. The tax-free component covers after-tax, non-concessional contributions. For most members who have accumulated superannuation through standard employer and salary sacrifice channels over a working life, the taxable component accounts for the substantial majority of their balance.

A death benefit paid to a tax dependant, such as a spouse, is received free of tax. Paid to someone outside that definition, the taxable component is subject to tax at 15% plus the Medicare levy, producing an effective rate of 17%.

To illustrate: a 66-year-old member with $900,000 in accumulation phase, of which $700,000 is the taxable component, dies and leaves the full balance to two financially independent adult children. Tax on the taxable component amounts to approximately $119,000. The children receive around $781,000 between them rather than the full $900,000.

One planning strategy that can reduce this outcome over time is re-contribution: withdrawing funds from superannuation and recontributing them as non-concessional, after-tax amounts, which progressively shifts the balance's composition toward the tax-free component. Whether that suits a particular person's circumstances is a separate question. What is relevant here is that the liability is predictable well in advance, and with sufficient lead time it is often partially or substantially avoidable.

Why nominations fail

Binding nominations tend to fail for routine, mechanical reasons. Lapsing is the most common: a three-year nomination executed in 2021 is no longer binding, and many fund members are unaware the renewal period has passed. Invalid witnessing accounts for a significant number of failures; a binding nomination must generally be executed before two adult witnesses who are not named as beneficiaries, a requirement that is easy to overlook when completing forms without guidance. Others fail because the fund never received the completed document. A nomination signed and filed at home has no legal effect; the fund must receive and record it for it to be valid.

Self-managed super funds require particular attention. The trust deed determines whether non-lapsing binding nominations are permitted, and the quality of that deed is consequential. A retail fund trustee is a professional entity with established processes; the trustees of an SMSF after your death are typically family members or co-trustees who carry considerably more discretion. Deed quality and trustee succession planning matter more in this context, not less.

There is also the option of nominating your legal personal representative rather than a named individual. In this case your superannuation passes into your estate and is distributed according to your will. For members with testamentary trusts, blended family arrangements, or complex estate structures, this can produce a more controlled outcome than a direct nomination to individuals. The tax implications remain and still need to be worked through, but the approach places the distribution decision with your will rather than your fund.

Reviewing what you have in place

A valid, binding, current nomination is not a complex document to put and keep in place. What makes it consequential is that the cost of an invalid or lapsed nomination only becomes apparent after death, at which point it cannot be corrected. If you are uncertain whether your current nomination is binding, properly executed, and still within its renewal period, that is worth establishing before the question becomes urgent.