• Question 1: I’m over 60 years of age, currently have an accumulative super fund and intending to convert to a pension fund. I’ve been advised after I convert to a pension fund to withdraw the full amount (close the fund) to then open a new pension fund and deposit the withdrawn money into this new fund. The reason given is that if the money is left in the existing pension fund and in the event of me dying, money remaining in the fund and withdrawn by others (beneficiaries) is taxable at the marginal rate. Is this correct and what are the tax implication of remaining money left in pension funds when the individual dies? Regards, Dave

Hi Dave,

What many financial advisers recommend is withdrawing funds from super (once you have access), either within accumulation or pension phase, then re-contributing back to super.

The purpose of this is to convert ‘taxable’ super components into ‘tax-free’ super components.

Why do this?

Because when you pass away your taxable component will be taxed at 17 per cent (which includes Medicare) if it is paid to beneficiaries not listed below:

• Spouse
• Child under 18
• A person with whom the deceased person had an interdependency relationship just before they died
• A person who was financially dependent upon the deceased person just before they died.

Whereas the tax-free component is always paid tax free no matter who the funds are left to.

Where this commonly comes into play is where you are single, or the last surviving member of a couple, and you want to leave your super balance to your adult independent children.

Most people have mainly ‘taxable’ components within their super.

This is because all of the following contributions go into the ‘taxable’ component:

• Employer SG
• Salary sacrifice
• Personal contributions where you claim a tax deduction
• All investment earnings while in accumulation phase.

So, unless you have made after-tax non-concessional contributions you may not have any tax-free component.

It’s not always visible on your statement what your components are, so you may have to contact your super fund to ascertain them.

Before undertaking this strategy, you have to ensure you can get the money back into super.

Currently the maximum non-concessional after-tax cap using the bring-forward rules is $330,000 assuming your balance is below $1,480,000.

Let’s look at an example;

Say you have $400,000 in super. Ninety per cent is in the taxable component ($360,000) and 10 per cent is tax free ($40,000) component.

If you were to pass away and left the money to adult children, the tax payable would be $61,200 (i.e. $360,000 x 17 per cent).

However, if you withdraw $330,000* and put the funds back into super as a non-concessional contribution, your components would now be:

• $63,000 taxable*
• $337,000 tax free.

The resulting tax on the $63,000 would be $10,710. That’s a big savings for your beneficiaries of more than $50,000. To be precise, it’s $52,290 ($63,000 minus $10,710).

*When you withdraw funds from super you cannot nominate which component, they are withdrawn proportionally, i.e. in this example a $330,000 withdrawal is made 90 per cent from the taxable component and 10 per cent from the tax-free component.

There are a few things to bear in mind, with very large super balances you could do withdraws and re-contributions over many years to reduce the taxable component even more.

If you have a smaller balance, or you think you will spend all, or nearly all of your super before death, then this may not be worthwhile. You also might not care if your beneficiaries have to pay some tax, hey, you will be dead after all.

Interestingly the Grattan Institute, a large, independent and influential lobby group have recently released a report where they call for this ‘loophole’ to be removed.

They argue it allows for wealthy individuals to pass down large inheritance tax free at the cost of other taxpayers. The government has not announced any changes as yet.

The above is a high-level overview and there are a few traps in relation to the cash out and re-contribution strategy, therefore I would recommend seeking personalised financial advice. 

• Question 2: I’m 64 and not currently working. I have $350,000, in a TTR plan and $90,000 in super. I am also about to receive $300,000 from my brothers who are buying my share of our parents’ house. What tax will be payable on the inheritance money and what investment can I do with that money?

You should not be liable for any tax once you receive the inheritance.

Given your age you can look to put the funds into super via a non-concessional (after tax) contribution to super.

At 65 there is no restrictions on accessing the funds and they will be in a very tax-effective environment.

Once you turn 65 your TTR pension should automatically turn into an account-based pension (also known as a super income stream). You should confirm with your pension provider that they will convert your TTR pension at that time.

This is better from a tax perspective as TTR pension earnings are taxed at 15 per cent within the fund (the same as a normal super fund) but once it converts to an account-based pension all earnings are tax free.

I recommend you speak to a qualified financial adviser in order to assist you in making the right decision for your long-term needs.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.

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