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Hewison Insights

How to avoid “death taxes” on your superannuation benefits.

Chris Colman
Wealth Adviser
27 Sep 2023

Inheritance taxes, or death taxes, have recently been receiving some media attention, this is off the back of incoming Productivity Commission boss Danielle Wood’s comments at the end of August. As it currently stands, Australia is one of just eight developed countries that do not tax inherited wealth, after prime minister Malcolm Fraser abolished federal death duties in 1979.

Around the world, there are some eye-watering tax rates for estates, including Japan at 55%, South Korea at 50%, France at 45% and the USA and UK at 40%. Although in Australia, beneficiaries of estates do not officially have an inheritance tax, 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.

Put simply, your superannuation balance has a taxable component and a tax-free component.

The tax-free component mainly consists of the non-concessional contributions made by the member to the fund, which are made from after-tax dollars. All other amounts made to the fund, such as concessional contributions and income from the fund’s investments, form part of the taxable component.

An untaxed element with different tax treatment can also 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.

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.

When you die, any taxable component left to a non-dependent is subject to a tax of 15 per cent, plus Medicare levy. A spouse or partner is always classed as a dependent in this case, but independent adult children are not.

What can be done about this tax?

There are two main ways to minimise and navigate this tax on superannuation death benefits:

  1. Appoint a trusted person as your enduring power of attorney, with instructions to withdraw your superannuation in full if it appears that death is imminent. There would be no tax on the withdrawal, and the money could then be distributed in accordance with the terms of your will after your death.
  2.  Withdraw superannuation benefits while you are still alive, ideally when you retire after age 60 so the withdrawal is tax-free and look to re-contribute funds, up to the allowable threshold  as a non-concessional contribution. This strategy can replace taxable benefits with non-taxable benefits and therefore reduce death benefits tax;

Recent changes mean that individuals can contribute to superannuation up to age 75 without passing the work test, as long as the fund balance as of June 30 of the previous financial year is less than $1.9 million.

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.

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