Having funds in superannuation is a great financial structure from a tax perspective.
During a members’ working life, earnings and contributions are taxed at 15 per cent, and then once in retirement phase, upon commencing an account-based pension, the earnings are taxed at 0 per cent (on pension capital up to the $1.9m transfer balance cap).
Despite this being a great vehicle to invest your money, you should be aware of the potential tax that applies to certain beneficiaries of your super upon your death.
When a person dies, if their spouse or child under 18 (or another tax dependent) receives their super as a lump sum, there is no tax payable on the superannuation death benefits they receive. On the other hand, if the lump sum death benefits are paid to a non-tax dependent, there is 15 per cent tax that applies on the taxable component of their superannuation balance and 30 per cent on any untaxed component. Common examples of a non-tax dependent are an adult child or the member’s estate (where the ultimate beneficiaries are not tax dependents). This tax is ultimately borne by the beneficiaries or withheld from the super payment.
This could be an important consideration for someone with a significant amount in super that they don’t expect to spend during their lifetime, and there are potential strategies that may be available to lessen its impact, so it’s a good idea to seek advice if this is a concern.
How does it work?
A member’s superannuation balance consists of the following components:
- Tax free
- Taxable
- Untaxed – this is not very common and will not be covered in this article.
As an example
For example, consider Anne (age 78) had a balance of $1.3m in her super before she passed away, which was made up of the following components:
- Tax free - $200,000
- Taxable - $1,100,000
Anne’s husband passed away a few years ago and she wishes to leave her benefits to her two adult children. The tax-free component will be received tax free, however, the taxable components will incur 17 per cent tax (including 2 per cent Medicare Levy) of $187,000 or 15 per cent (excluding Medicare Levy) of $165,000 if paid via her estate.
What can be done to reduce this future tax?
Some strategies may include:
- Withdrawing her entire member balance before she passes away – which may prove to be difficult without perfect foresight.
- Withdrawal and re-contribution strategy to reduce the taxable portion of a member’s balance (subject to age and balance restrictions).
With the removal of the work test for those aged over 67 from 1 July 2022, there is now a wider opportunity for those with a total superannuation balance under $1.9m to make non-concessional contributions. Note that the work test is still applicable to those wishing to make concessional (tax deductible) contributions.
A withdrawal and re-contribution strategy does not require the injection of additional cash into superannuation and can be used to achieve a number of benefits including evening up superannuation balances between spouses, mitigating future changes to superannuation thresholds or taxes, and potentially reducing the final amount of tax borne by non-dependent beneficiaries.
In the case of Anne, if she had the opportunity to make withdrawals and re-contribute to her super over a number of years, the potential tax paid by her adult children could have been significantly reduced through careful planning.
We’re here to help
If you would like to know more about how tax applies to your superannuation benefits or have queries in relation to your broader superannuation planning, please contact one of our experts at Grant Thornton.
Learn more about how our Superannuation and SMSF services can help you
The above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. None of the information provided takes into account your personal objectives, financial situation or needs. You must determine whether the information is appropriate in terms of your particular circumstances. For financial product advice that takes account of your particular objectives, financial situation or needs, you should consider seeking financial advice from an Australian Financial Services licensee before making a financial decision in relation to any of the matters discussed.
