RSM Australia

How to combat super death tax

Many years ago we had death taxes, otherwise known as probate duty. This tax was imposed by both State and Federal governments with gift duties thrown in just to make sure you did not die with no assets and avoid paying probate duty.

Because farmers are asset rich and income poor, death duties were seen to be very unfair.

Paying tax for the privilege of passing on the family farm to the next generation often created financial hardship and in some cases forced the sale of family farms.

Today, many family farms or at a least a portion of them are held within self-managed superannuation funds. Many farmers do not realise that inheritance taxes can apply when superannuation benefits (including the farm) pass to independent adult children, when the surviving parent dies. Death duties can also apply where superannuation bypasses a spouse and goes direct to a non-dependent.

Further, if you are over 60 and drawing down a tax free superannuation pension, the law prohibits you from leaving that pension to an independent adult child.

When non-dependents inherit your superannuation benefits, tax will be payable on the taxable component of your accumulated superannuation. To complicate things further, the taxable component can have up to two elements.

What we call the taxed element represents contributions made by your employer and personal contributions that you have claimed a tax deduction for, plus the earnings of all of these contributions. In other words the taxed element is those contributions that have already attracted the 15% contributions tax.

On death, your independent children will pay 17% tax on this portion of your superannuation.

The second element is referred to as untaxed and typically represents life insurance proceeds, where the premiums have been paid by your super fund. On death, your independent beneficiaries will pay up to 32% tax on this portion!

So can this nasty superannuation death tax be reduced now or can it be reduced when I die?

In my next article, I will outline a strategy for somebody under the age of 75 who may be able to reduce the 17% death tax during their lifetime.

We will also examine an option with avoiding the savage 32% tax on life insurance proceeds. Where there are dependents, the simplest way to avoid these death taxes is to pass superannuation benefits, preferably as reversionary pensions to dependents. Simultaneously, non-dependents could be provided for, by placing financial obligations on dependents or leaving non superannuation assets to non-dependents.

In summary, everybody's circumstances will be different. There is no cookie cutter solution.

Do you know how much tax your beneficiaries will pay on your superannuation investments if you die tomorrow? Make time in 2015 to increase your family's inheritance.

This information is not intended to constitute as advice.