Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 81

Does your will treat your super fairly?

It is a common strategy to arrange your life insurance through your super fund. The fund can often buy insurance at wholesale rates, and by using salary sacrifice, you can effectively pay the premiums from pre-tax dollars.

Tax on superannuation paid to a non-dependant

But tax may be payable on the proceeds of the policy if it is left to a non-dependant. Often a young single person has, say, $300,000 of death cover through their work super fund. They are unlikely to have dependants for tax purposes, so if they were killed in a car accident the Tax Office would take around $100,000, leaving around $200,000 in their estate.

Where tax is payable by an estate, the tax becomes a general liability of the estate. As a result things can get much more complicated if the deceased is older and the estate does not have the money to pay the tax.

Think about a single father aged 50 with three adult children who all work, and one of them lives at home with him. His house was worth $380,000 in 2008 when his will was drafted. He has $300,000 in super Fund A, and just $15,000 in super Fund B. There is also a $300,000 insurance policy in Fund B – this fund is paying the premiums because it has the smallest balance.

He wanted his will to treat his children equally. Therefore, it was drafted to give the first child the proceeds of Fund A, the second child the proceeds of Fund B and the residue of his estate to child three who was living at home. The father figured that would be the house and the contents and each child would receive roughly the same amount.

Unfortunately, the will drafter did not understand the effect of the death tax on insurance policies held in superannuation.

When the father died suddenly, the children got a terrible shock when they discovered they were not going to be treated equally at all. Ordinarily it would be thought that the first child would receive around $255,000 as the proceeds from Fund A would be taxed at 15%, while the proceeds of the insurance policy held by Fund B would yield approximately $215,000 after the tax of approximately $100,000 was deducted. Life insurance proceeds held within superannuation suffer a much higher tax than ordinary superannuation benefits because they are treated as ‘untaxed’ and are subject to 30% tax (excluding Medicare levy) when paid to a non-dependant.

Problem 1: Super funds do not deduct the death tax and send the balance to the estate. Rather, they send the entire amount to the estate - it is the estate which has the obligation to send the death tax to the ATO.

Problem 2: Because the will specifically gave "the proceeds of Fund A" to the first child and “the proceeds of Fund B” to the second child, they would be entitled to the whole of $300,000 and $315,000 respectively. The tax still has to be paid, but it won’t be coming out of the proceeds received from either of Fund A or Fund B. The executor of the estate has a responsibility of paying $145,000 to the Tax Office ($45,000 death tax on Fund A and $100,000 death tax on Fund B).

Estate left to pay the tax

Because children one and two have received specific bequests, the tax can only be paid out of the residue of the estate. Using a concept known as ‘marshalling’, the executor will probably have to sell the home to pay the $145,000 tax bill leaving child three with net benefits of only $105,000. Not only has the third child borne the cost of the tax payable on both of the superannuation payouts, but the family home has been sold to pay the tax bill.

It is critical that anyone drafting a will understands that all assets are not treated equally for tax purposes. The difference between CGT-free assets like the family home, and investment properties that carry a CGT liability, are generally well known. But few understand the tax treatment of insurance policies held within superannuation, let alone the different tax treatment of the various components arising from contributions made to superannuation funds. As the above example shows, failure to take this tax into account can have disastrous and unforeseen consequences.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His website is www.noelwhittaker.com.au.

 


 

Leave a Comment:

RELATED ARTICLES

Wealth transfer isn't just about 'saving it up and passing it on'

Most estate planning for tax is inadequate

Limits to a will’s power over an SMSF

banner

Most viewed in recent weeks

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.