Finance Your Budget Ask the Expert: How the ATO treats superannuation death benefits
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Ask the Expert: How the ATO treats superannuation death benefits

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Question 1: I have $1 million in cash and $1 million in super. I have been told that when I pass away and my two sons inherit this, the $1 million cash is tax-free, however, the $1 million in super will be taxable. Is there a way around this?  

In Australian there is no inheritance tax, so money in a bank account will pass tax free to all beneficiaries.

For super, it’s a little more complicated. It depends on two things, assuming you still have money left in your super when you die:

  1. The tax components of your super
  2. Your beneficiaries (to whom the money will be paid).

Tax components

Any ‘tax-free’ component will always be paid out tax free no matter to whom the money is paid.

If paid to a non-tax dependant, the ‘taxable’ component will be taxed at a rate of 17 per cent (including Medicare).

Your super fund can advise you of the tax components within your super account.

Beneficiaries

If your beneficiary is a dependant under the tax act then the benefits will be paid tax free, regardless of the tax component.

However, if they are not classified as a tax dependant, then the taxable component is taxed up to 17 per cent (including Medicare).

Super death benefits dependants for tax purposes are any of the following:

  • The deceased person’s spouse or former spouse
  • The deceased person’s child, aged less than 18
  • Any other person with whom the deceased person had an interdependency relationship just before he or she died
  • Any other person who was a dependant of the deceased person just before he or she died
  • An individual who receives a superannuation lump sum because of the death of another person if the deceased person died in the line of duty as a member of the Defence Force, Australian Federal Police, police force of a State or Territory, or as a protective service officer.

Most people leave their super to their spouse, in which case all the super would be paid tax free.

Inheritance tax

Where we see this tax most commonly applied is when super is left to adult children who are not dependant on the deceased at the time of passing.

If you have an estate-planning goal to reduce tax for your children, there are some things you could consider.

When you reach your twilight years, or if you become unwell, you can simply withdraw the money from super yourself.

From age 60 all super withdrawals are tax free.

Additionally, if you are under the age of 60 and have a terminal medical condition, then funds can again be withdrawn tax free.

Now, of course, there is a risk you may die suddenly and not have an opportunity to take the funds out yourself.

The most common approach in these circumstances is called a “cash out and recontribution strategy”, where the aim is to withdraw some taxable component and recycle it back into super via a recontribution, in order to increase the tax-free component.

I have detailed this strategy in a previous article.

Note that there are rules around how much and when you are allowed to redraw, and eligibility rules around how much and when you can recontribute.

Be aware that if this strategy is done incorrectly there could be adverse tax consequences, or you may not be able to recontribute all of your cashed-out funds back into superannuation.

I have seen many people hit by fines as they have breached their contributions caps trying to implement this strategy.

I would therefore suggest seeking advice from a financial planner, especially given the sum involved.

Question 2: I want to put $100,000 into my super, from the sale of a block of land. I am 58, work almost full-time, and have not made any personal contributions to my super fund over the past three years. My wage will be about $50,000-60,000 this financial year. I have under $500,000 in my super now. What should I do? – Marie

Hi Marie,

Contributions to super can be either ‘concessional’, which include salary sacrifice and personal tax-deductible contributions, or ‘non-concessional’ after-tax contributions.

A personal tax-deductible contribution will reduce the amount of income tax you pay, as it reduces your taxable income.

This may be even more important if you have made a capital gain on your block of land and have to pay capital gains tax.

Concessional contributions are taxed at 15 per cent by the super fund. However, based on your stated income, this is much lower than your marginal tax rate of 34.5 per cent (including Medicare).

A non-concessional contribution goes into your super without the fund taking 15 per cent in tax. But you do not then claim a tax deduction for these types of after-tax contributions.

There are caps on how much you can contribute to super. For concessional contributions it is $25,000 this financial year, $27,500 next financial year, and potentially higher if you use the carry-forward provisions, which I covered in a previous article.

Also bear in mind that your employer SG contributions also count in this cap.

Most likely, the best scenario will see you make a partial tax-deductible contribution to reduce your overall tax, and, with the remainder, make an after-tax non-concessional contribution.

By making a non-concessional contribution you may also receive a very small government co-contribution (the income cut-off threshold for 2021-22 to receive this is $56,112).

You can find out how much you can pay into super without exceeding your concessional contributions cap by accessing the ATO’s online service through your MyGov account.

Click on the ‘Super’ dropdown bar and then go to ‘Concessional Contributions’ under the ‘Information’ tab to find out your available concessional contributions cap.

The optimal amount of concessional versus non-concessional contributions will depend on your overall taxable situation.

You could seek advice from your super fund or a tax adviser to assist you with this.

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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