RSM Australia

Clarify death taxes

Wealth Management Insights

We know that if superannuation passes to our spouse or children under 18 on our death, there is no tax to pay. On the other hand, some or all of our superannuation benefits will be taxed at either 15% or 17% when it passes to an independent adult child.

The taxable component within your superannuation fund will exist regardless of whether you have an accumulation account or a pension account or both. Just because you are over 60 and drawing down your superannuation tax free, it does not mean that your non dependants will inherit the same dollars tax free.
 
It is therefore worthwhile to analyse your superannuation benefits on a regular basis and calculate how much tax your independent children would pay if they received your superannuation benefits today. For example, $500,000 of taxable benefits could attract a tax liability of $85,000.
 
With the right advice, there is a strategy that can be employed to reduce and possibly remove this death tax.
 
Once you reach 65 years of age your superannuation benefits are fully accessible. Provided you pass the 'work test' each year, you could withdraw up to $180,000 per annum from your superannuation fund and re-contribute those funds back to your superannuation fund until the age of 75. In addition the withdrawal of your $180,000 would form part or all of your minimum pension drawdown for that year.
 
Similarly, where a member has satisfied a condition of release after turning 60, then before the age of 65 he or she could withdraw up to $540,000 of superannuation benefits and recontribute this amount in one year. In these circumstances, we must carefully consider any superannuation contributions in the last three years and recognise that we may not be able to make any further contributions for the next three years.
 
Regardless of the age group, the strategy works on the basis that each re-contribution will be non-concessional. In other words, we are changing taxable amounts in the superannuation fund to tax-free amounts.  Once a contribution is made then it would be logical to commence a pension from that contribution to ensure that the earnings from that amount are exempt from tax.
 
We should also be very mindful of the impact on any Centrelink benefits from commencing a new pension. On the other hand where one spouse is over 65 and the other is under 60, there is an opportunity to increase Centrelink benefits.
 
Another strategy to remove the 17% death tax, provided there is proper planning and documentation, includes the use of an enduring power of attorney. This would involve written instructions to withdraw monies from a superannuation fund when certain pre specified events occur.
 
The advantages include the fact that the plan will be effective even if a member becomes incapacitated. In addition the funds do not physically need to be withdrawn prior to the member's death.
 
Seeking advice from a superannuation specialist is the key to increasing your children's inheritance.