Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 270

Strategies for avoiding the super 'death duty'

Whenever I make a speech to retirees, I talk about the death tax of 15% (or 17% when it includes the Medicare levy), which can apply to superannuation death benefits. Most people have never heard of it, and believe that Australia doesn’t have death duties.

Well, I guess it is not, strictly speaking, a 'death duty', but the effect is the same. So take the time to get your head around it, as it’s an easy tax to minimise with a bit of planning.

Value of a re-contribution strategy

The first thing to understand is that it applies only to the taxable portion of your superannuation fund that is given to a non-dependant. A spouse is always a dependant whether they have a separate income or not.

It does not apply to the tax-free portion of your super, so those over 60 and still eligible to contribute to super could take advice about adopting a withdrawal and re-contribution strategy. This involves taking out a chunk of your super tax-free, and then contributing it back as a non-concessional contribution.

There is no cost involved, as there is no entry tax on these contributions, and it effectively converts the amount re-contributed into a tax-free component. But watch the contribution limits as there are big penalties for exceeding the caps.

The next thing to understand is that you cannot elect to withdraw just from the taxable component. If your balance is partly taxable and partly non-taxable, the components of the withdrawal will be in the same ratio as your existing balance.

Taxable components of a tax-free fund

Many retirees are in pension phase, which means the earnings on their fund are tax-free, as are the withdrawals if they are aged 60 or over and eligible to withdraw. However, the tax-free status of the fund does not mean that all the components become tax-free as well. There will almost certainly still be taxable and non-taxable portions of the components, with the death tax applying to the taxable component when paid to a non-dependant.

One reader asked if the death tax could be avoided by leaving the money to a charity. There is no joy here, as a charity is treated in the same way as a non-dependant. A much better option for anybody who wants to leave money to charity would be to withdraw it from superannuation before they die, make an immediate donation and claim a tax deduction.

However, if you are receiving Centrelink benefits, take advice before doing this, because the gift could be regarded as a deprived asset if it is over $10,000.

Strategies for avoiding death taxes

So, if the tax does apply, how is it calculated? It is a maximum of 17%, not a flat 17%, and is deducted by your superannuation fund before paying your beneficiary the death benefit. The tax paid is recorded on a PAYG payment summary (similar to wages). When your beneficiary lodges their personal tax return, the assessable amount received and PAYG withheld must be reported. If they have a high income, or if the sum is large, the tax is rebated so that no more than 17% is payable. If they have a low income, they may receive a refund of the tax paid by your super fund.

If you are considering a binding nomination, make sure you clearly understand the implications before setting it up. Once a valid binding nomination is in place, the trustee may lose the discretion to distribute the proceeds of the deceased’s superannuation fund in the most tax-effective manner.

The simplest way to avoid the death tax is to make sure you have given a trusted person an enduring power of attorney, with instructions to withdraw your superannuation in full if it appears that death is imminent. There would be no tax on the withdrawal, and the money could then be distributed in accordance with the terms of your will after your death.

 

Noel Whittaker is a leading financial adviser and the author of Making Money Made Simple and numerous other books on personal finance. Noel writes an excellent monthly newsletter and a free subscription is available on this link

12 Comments
Dino
September 27, 2022

Hi Sir
My son is returning for good. Sold his home in Holland and wants to know if there are any tax implications in bringing $400k in cash savings to purchase a home here by end of 2022.
Very appreciative
Dino

Graham Hand
September 27, 2022

Sorry, Dino, we cannot provide such personal advice and we do not know your son's full circumstances. We only provide general information. You will need to speak to a qualified adviser.

Barbara Ryan
August 28, 2021

DUE to re-contribution strategy all but $1000 is tax free component in our SMSF. Is the amount of money earned by the superfund and therefore its increase in value then considered a taxable component?

Kate
September 11, 2018

Well written as always, Noel! Definitely something not many people are aware of and agree with the need for an enduring Power of Attorney.

You mentioned 'there are no costs involved' with the re-contributions strategy. True there are no taxes, however there could be costs in the form of CGT, buy/sell spreads and/or transaction fees.

Jason
September 10, 2018

Well done on raising awareness of this Noel. It has received next to no air time to date and is going to be a huge and unnecessary expense for many families simply because they don't know about it or what to do about it.

You're one of the good guys in the financial advice world.

David
September 06, 2018

Given, as we're often told, super isn't intended to be a vehicle for intergenerational wealth transfer, what's fundamentally wrong with paying some tax upon the death of the member?

Seems to me all the younger generations complaining about the inequity of the financial system generally should fully support some of that inequitably-acquired wealth flowing back into government coffers to fund schools and hospitals and teachers and nurses.

But wait, it would mean they would inherit less, wouldn't it? Still, it's the moral stand to take. Tricky...

I speak as one who, alas, has no dependants, and is happy to pay tax to support the rest of society before whatever's left gets distributed to various friends and relatives via my will. I'll be dead, of course, so it doesn't matter to me.

Chris
September 08, 2018

David, as long as that's where it went, but you know, and I know, that "that just isn't going to happen", you're kidding yourself. It will go into 'general revenue' and get used to fund pet projects, it's far too tempting.

The younger generations, of which I consider myself as a Gen-X, rightfully DO complain about the inequity of the financial system because it is, and always was, about boomers. They make up the biggest portion of the voters, they are the ones who you could also argue are the most politically engaged now, seeing as the younger generations have lost faith in the politicians.

So what do you really expect when the system is set up to please the masses from whom they will get votes ? It's pork barrelling.

Personally, I'm not expecting to inherit anything because (a) my parents were not rich and (b) the "SKI" attitude of the boomers. Good riddance, as far as I'm concerned, because I will be a self-made man regardless.

SMSF Trustee
September 11, 2018

Chris, have you actually looked at any budget documents lately? Have you actually looked at what government spending goes to? There's a lot spent on schools and hospitals and teachers and nurses, to courts and legal services, for the defence of our nation, for aged care services and pensions; there's spending on roads and other infrastructure, and the list goes on. Maybe the odd "pet project", but for goodness' sake don't let your political emotions get in the way of the facts. We are very fortunate not to live in a Zimbabwe or other 'banana republic' where taxes are only spent on pet projects, so I get really annoyed when people try to make it sound like our system is broken.

And no one is a self-made man. The teachers that other people's taxes provided you had some input; the police who keep you safe were paid for by other people's taxes; the courts who ensure that an invention you might make remains your property are paid for by other people's taxes; the hospital that will treat you when you get ill is paid for by other people's taxes and/or health insurance premiums. So get off your high horse sunshine and acknowledge that we're all in this together and that our community way of life is pretty decent.

Allan
September 06, 2018

That is the silliness in the design of this tax measure. Forewarned of your impending doom with time to act equals no tax paid by beneficiaries. Expire unexpectedly and 17 percent is taken in tax.
Yet another crazy example of our make it up as they go tax system.

john
September 06, 2018

In the case of an smsf there usually would not be time if death is imminent to do the necessary arrangements

David
September 06, 2018

Thank you Noel, a simple concise explanation of the superannuation 'death tax'. (PS:- went to a talk you did about 40 years ago and still follow and take great advice from your wealth of knowledge)

Ashley
September 05, 2018

Good stuff, Noel. Looks like a lot of paper shuffling but the best part is to get an enduring POA to withdraw the money the day before you die.

 

Leave a Comment:

     

RELATED ARTICLES

What happens to your super when you die?

Are death bed benefit super withdrawals effective?

Four ways to avoid super death benefit taxes

banner

Most viewed in recent weeks

An important Foxtel announcement...

News Corp's plans to sell Foxtel are surprising in that streaming assets Kayo, Binge and Hubbl look likely to go with it. This and recent events in the US show the bind that legacy TV businesses find themselves in.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Welcome to Firstlinks Edition 578 with weekend update

The number of high-net-worth individuals in Australia has increased by almost 9% over the past year, and they now own $3.3 trillion in investable assets. A new report reveals how the wealthy are investing their money.

  • 19 September 2024

The everything rally brings danger and opportunity

Most market players today seek quick rewards and validation of opinion. Outsiders willing to combine new technology with old-fashioned patience and focused analysis can prosper.

Creating a bulletproof investment portfolio

Is it possible to build a portfolio that performs well in any economic environment? So-called 'All Weather' portfolios have become more prominent of late, and this looks at what these portfolios are and their pros and cons.

Latest Updates

Retirement

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

The everything rally brings danger and opportunity

Most market players today seek quick rewards and validation of opinion. Outsiders willing to combine new technology with old-fashioned patience and focused analysis can prosper.

Investment strategies

Portfolio construction in the real world

Building a portfolio is like building a house. This framework can help you move towards your goals without losing sight of reality or leaving yourself vulnerable to market storms.

Shares

Feel the fear and buy anyway

In this extract from his new book, the co-founder of Intelligent Investor reveals how investors can avoid critical mistakes and profit from opportunities in collapsing share prices.

Investment strategies

The risks of market concentration and not staying invested

MFS chief investment officer and CEO elect Ted Maloney talks market risks, similarities between Trump and Harris, and the most important thing investors can do to avoid destroying value.

Gold

Gold's important role as geopolitical tensions rise

Equity markets have traditionally struggled at times of sustained geopoltical tension. Gold, on the other hand, has thrived and can provide investors with protection against "unknown unknowns".

Strategy

The changing face of finals footy and the numbers behind it

A well-meaning AFL rule change in 2016 seems to have had unintended consequences. The top teams might cry foul but AFL bosses are unlikely to be too miffed about the outcome.

Sponsors

Alliances

© 2024 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.