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Unlike many other countries in the OECD, Australia does not apply taxes or duties on a deceased estate. However, if you think your beneficiaries will pay no tax upon your death you might want to think again. Superannuation is one area which is often overlooked.
Globally, the highest top estate tax rates can be found in Japan, at 55%. South Korea (50%), France (45%) and the USA (40%). Only fifteen of the thirty-four countries in the OECD have no taxes on property passed to beneficiaries.
However, in Australia, several factors can influence how tax is applied to your superannuation benefits upon your death, such as your age and whether your super comes from a taxed or untaxed source. The tax treatment of your superannuation death benefits is also affected by whether the benefits are paid as a lump sum or an income stream (i.e. regular payments) and whether your beneficiaries are classified as dependants or non-dependants.
The first thing to understand is that tax applies only to payments made to ‘non-dependant’ beneficiaries. To be classified as a tax ‘dependant’ and therefore eligible to receive a superannuation death benefit tax-free you must be either of the following:
For non-tax dependants, tax will only be payable on any taxable component of the lump-sum super benefit, which may include both a taxed and/or untaxed element. The taxable component of your super is the proportion that was originally sourced from concessionally taxed contributions (salary sacrifice contributions and employer contributions) and investment earnings and excludes any proportion sourced from non-concessional or after-tax contributions.
An untaxed element will typically only arise where the death benefit includes proceeds from a life insurance policy held by the fund, or where the death benefit is being paid from an untaxed super fund, for example, certain government sector superannuation funds.
The taxed element is subject to a maximum tax rate of 15% plus the Medicare levy. The untaxed element is subject to a maximum tax rate of 30% plus the Medicare levy.
There are two options to consider which can assist in reducing tax applicable to superannuation death benefits.
When considering the above strategies, it is important to seek the advice of a professional adviser. The tax treatment of each individual’s superannuation benefits will vary considerably and so to their ability to implement an effective withdrawal re-contribution strategy.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.