When a super member dies, their balance is paid out as a death benefit — to dependants, non-dependants, or the estate. The tax treatment depends on (a) who receives it, and (b) whether it's the taxable or tax-free component of the balance. Tax dependants (spouse, children under 18, financial dependants, interdependent persons) receive the full balance tax-free regardless of components — both lump sum and pension forms.

Non-dependants for tax purposes (most commonly adult children over 18 who weren't financially dependent) are taxed differently. The tax-free component is paid tax-free. The taxable component is taxed at 15% plus the 2% Medicare levy = 17% effective. So a $400,000 balance that's 80% taxable / 20% tax-free passing to an adult child loses 17% × $320,000 = $54,400 in tax. The estate sometimes acts as a conduit but is treated as the recipient for tax purposes — the 17% rate applies if the eventual beneficiary is a non-dependant.

The standard planning move to reduce death-benefit tax is the 're-contribution strategy': while still alive (and meeting age / work-test / contributions-cap rules), withdraw a portion of super and re-contribute it as a non-concessional contribution. The re-contribution is treated as tax-free component going forward. Done over several years, this can convert most of a balance from taxable to tax-free — saving 17% on the eventual death benefit. Subject to many constraints; get advice well before retirement.