RSM Australia

Reduce tax on your super

Investing your hard earned monies into superannuation can have one serious sting in the tail. Put simply, your non-dependent children will pay 17% on the taxable portion of your superannuation benefits when you die. The aim with any tax impost is to reduce it as much as possible, whilst complying with the laws of the day.

One possible solution that works particularly well for superannuation members between the age of 60 and 75 is the recycling strategy. It is relatively cheap to administer, it can be repeated in future years and works even better if a pension is commenced immediately thereafter.

This withdrawal and recontribution strategy can be used provided certain conditions are satisfied.

Between the ages of 60 and 65, a member must meet what we call a condition of release. If you retire after turning 60, then you automatically have access to all of your superannuation benefits. Alternatively, if you have a change of employment status after turning 60 then you also satisfy a condition of release. Professional advice should be obtained before relying on the change of employment condition.

A person between the age of 60 and 65 who has met a condition of release, could withdraw and recontribute up to $540,000 of superannuation benefits once every 3 years. By way of example, and to indicate the tax involved, if their superannuation benefits included a 75% taxable component, the death tax savings for a non-dependent beneficiary could be up to $68,850.

Once a member reaches 65, their superannuation benefits are no longer preserved and therefore totally accessible. However, the maximum superannuation contribution each year is $180,000 provided they pass the work test. In other words, the member must be gainfully employed (not charity work) for a minimum of 40 hours in a continuous 30 day period, once in any year. This work test applies to the age of 75. Contributions to superannuation funds are forbidden after turning 75.

Many farmers with superannuation funds are actively involved in farming after the age of 65 and the potential savings in death taxes for surviving children can be significant.

To execute a recycling strategy, the dollars must be withdrawn from the fund, paid to the member and then recontributed to the superannuation fund. A mere book entry is not acceptable.

In the unfortunate circumstances where a member has been diagnosed with a terminal illness, it may be very beneficial to withdraw superannuation benefits prior to death and avoid the 17% tax.

When death occurs and no recycling of superannuation benefits has been implemented, then another strategy could be used to reduce the impact of this 17% tax on the taxable portion of the fund passing to adult children.

Consideration should be given to accessing what we call the anti-detriment benefit. This complex arrangement involves the initial 15% tax paid on deductible superannuation contributions, the use of a reserve within the fund and providing large future tax deductions for the fund.

In my previous article, I also referred to the potential 32% tax on life insurance proceeds received by a superannuation fund. Many taxpayers often arrange for life insurance premiums to be paid by their superannuation fund so as to claim a tax deduction for those premiums.

However, members and their beneficiaries should also weigh up the cost of paying up to 32% tax on benefits versus no tax if the same policy is held outside the superannuation fund.

Some farm succession plans include using life assurance proceeds to increase the amounts paid on death to non farming children. Often advisors suggest that the life cover should be increased to compensate for the tax component. Naturally this will come as an extra premium cost and may involve a more rigorous assessment by the insurer.

In closing, the first move is to find out how big your death tax problem is. The next step is to assess the options and take action using the assistance of a specialist advisor.

This information is not intended to constitute advice.