Many Aussies are dying with large super balances because they are spending frugally in retirement so they can pass on as much as possible to their children, according to research by CSIRO.
If that’s your plan you need to make sure you set up your affairs properly because if you don’t your beneficiaries could end up paying “death” tax.
Super balances are broken down into tax-free and taxable components. The taxable component generally consists of your employer’s SG contributions and any salary sacrifice contributions.
“When a person dies and their super is passed onto non-dependants, such as adult children, there is a 15% (plus surcharges) tax applied to the taxable portion,” explains Sam Henderson, from Henderson Maxwell. “Simply put, this is a death tax. And it’s potentially avoidable or reducible.”
He gives this example: Let’s say Richard is 62, single and retired with $450,000 in his super fund, and he sadly passes away suddenly. His assets will be inherited by his two children David, 36, and Katie, 34. Both adult children are married, financially secure and living independently of their father at the time of his death.
If Richard’s super is made up of a $450,000 taxable component and a $50,000 non-taxable component, then his super fund will be required to pay 15% on $450,000, or $67,500, in death tax. That’s $67,500 that his children won’t inherit.
One way to avoid this is to make sure your super goes to someone who is “financially dependent” on you, such as a spouse (including same-sex partners) and children under 18. Of course, this might not always be an option if you aren’t partnered or your children are adults. Others may also qualify as a dependant for tax purposes.
Another option is to take out your super and then leave it to your beneficiaries as part of your will.
“The obvious downside of doing this is that it is now back in a taxable environment – any income earned on what is now in your personal name is fully taxable. So doing this closer to your likely death will reduce tax payable on income earned while you’re still alive,” says Bruce Brammall, of Bruce Brammall Financial.
“This can obviously be tricky – many don’t get warning of their ‘date of death’. But some do, as their health gradually declines.”
A third alternative is to take advantage of the recontribution strategy. Essentially, you withdraw money from your super fund and recontribute it to the fund as a non-concessional contribution.
Using the earlier example of Richard, under current rules by using the recontribution strategy he would potentially lower his taxable portion to $0 and save his beneficiaries $67,500 in death tax, says Henderson.
But be aware that the caps for non-concessional contributions will be reduced from July 1.