Written by Hudson Adviser Kris Wrenn
In my experience when speaking with members about their Superannuation, consideration is rarely given to the fact that their beneficiaries may pay a significant amount of tax when inheriting their Super. This may be down to the fact that most expect to “run down” their Super over time. “The Super is mine, the kids can have the house” is a common response I receive. That’s all well and good, but the reality is that in an effort to last out their Super, thousands of us depart this world each year with something left in there, in many cases significant amounts.
The rules. If you pre-decease your spouse or de-facto partner, and they are named as your beneficiary, then never fear, they will not pay any tax when receiving your Super balance. If your partner has pre-deceased you however, and if your children are over 18 and not financially dependent on you, and they are named as beneficiaries, then they likely WILL pay tax. The tax is levied at 15% + medicare for most of us (with taxable balances), and at 30% + medicare for those with untaxed funds (often Government workers).
Imagine a scenario where someone dies with $200,000 in their Super (taxable component), and leaves their Super to their adult children, the kids would effectively be looking at a $34,000 tax bill. That is a lot of money to be giving to the ATO, potentially unnecessarily.
Two potential ways to avoid this. Firstly, if you become aware that your time may be running out, then you can opt to draw out your Super balance into your bank before you die. This is perfectly legitimate and your children will pay no tax. The risk is that you live longer than you think and as such start to pay tax on your earnings. A second method could be a “re-contribution strategy”. You could draw out a lump sum (if eligible) and re-contribute it back to Super as a non-concessional contribution. These contributions form part of the tax-free component of your Super and are not taxed upon your death.
Limitations to this strategy for those under age 65 are that there is an annual contribution limit of $100,000, with the possibility of using the “bring forward rule” and contributing $300,000. If you are over age 65 and working you can contribute $100,000 a year (but not use the bring forward rule). And if you are over age 65 and no longer working you cannot contribute to Super.
Final comment. If you call in to the last category and are over 65 and no longer work, from July 1st you may be eligible to contribute to Super, IF you sell your Principle Place of Residence, and have lived in it for at least 10 years. As such, this could be a great time to potentially action the “re-contribution” strategy and pull money out of Super only to put it back in. It won’t help you but if the worst happens it may save your kids tens of thousands of dollars.