During the recent federal election, a scare campaign claimed that the Labor Party was planning to introduce a ‘death tax’ if elected. Although this was nonsense, the fact is death taxes already exist for superannuation payments, introduced by a Liberal government nearly 15 years ago.
Politics aside, you need to be aware of the likely tax implications if you die leaving a superannuation lump sum, and how to eliminate or reduce the tax. This is a financial area that can be quite complex and some initial information is required.
Importantly, superannuation lies outside a personal will. Superannuation funds are trusts defined by a trust deed, which is implemented by trustees. It is the trustees who determine who receives your superannuation when you die and so you should ensure that they are aware how you want your superannuation paid out. (It is also important that you have a current and valid will.)
How is super taxed?
Understanding some basic jargon used in the superannuation world helps to clarify tax implications. There are two broad types of superannuation contribution. Firstly, concessional contributions. These include employer, salary sacrifice and tax-deductible contributions. As they enter a super fund, they are taxed at a ‘concessional’ flat rate of 15% rather than the marginal tax rate that applies to your salary.
Secondly, non- concessional contributions. These contributions are generally paid from money on which you have already paid a full rate of tax – consequently there is no ‘concession’ involved. No tax is applied as these contributions enter your super account. Each type of contribution is ‘tagged’ as it enters your super fund. Concessional contributions become ‘taxable contributions’ and non- concessional contributions become the ‘tax- free contributions’. These tags remain for as long as you are alive, following you all the way to the grave.
If you read your annual superannuation statement, you will see how your super is apportioned between taxable and tax-free components. This ratio will change from year to year as you make further contributions and earnings are credited to your account. Your beneficiaries and/or your estate may have to pay tax on the taxable component, depending on your personal circumstances and the instructions you have provided to the trustees of your super fund.
How much “death tax” would I have to pay on my super?
How much tax applies to the ‘taxable component’ of your super death benefit will depend on your age at death and the age of beneficiaries, whether the recipient is a dependant and whether the benefit is paid as a pension or a lump sum.
For dependants receiving a lump sum benefit, no tax is applicable regardless of age. However, for non-dependants, a tax rate of 15% generally applies plus the Medicare Levy of 2%.
Example 1. Don is happily married to Susie. Don dies suddenly aged 59. As his dependant, Susie receives his entire super benefit tax free.
Example 2. Fiona, aged 64 and widowed, has a taxable component in her super of $200,000. She dies and has advised the trustees of her super fund to pay her death benefit directly to her only adult child, who is not a dependant. Her son will be obliged to pay tax of $34,000 (17% of $200,000). If Fiona had advised the trustees to pay her benefit to her estate, the Medicare Levy would not apply. This alone would save $4,000 in tax. Her child could then receive an increased benefit, assuming he is the sole beneficiary of her estate.
Example 3. Mary, aged 74, has some warning that she has just months to live. She withdraws her entire superannuation benefit of $300,000 tax free, as she is over 60, and banks it. She has an adult daughter, who is not a dependant but is her sole beneficiary. Because Mary took appropriate action, her daughter will pay no tax on what was her super benefit.
These examples provide a glimpse of the complexity of superannuation death benefits and how to deal with them. Personal circumstances can vary enormously, so it is important to consider how you wish your super benefits to be paid should you die. You can allow the trustees’ discretion when paying your benefits or make a ‘binding nomination’, which is legally binding.
It is also a sound idea to have a current will that is consistent with any instructions you provide to superannuation trustees. A little thought and seeking sound advice can eliminate or minimise this nasty ‘death tax’.
Note: This article is in no way intended to provide you with personal advice and you should discuss your own circumstances with your authorised financial adviser before committing to any decisions on matters raised in this article.