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Australia’s “secret” inheritance tax

History

By 1895, each Australian State had introduced its own inheritance (estate) tax. This tax was also often referred to as “death duties.”

Federal inheritance (estate) tax was introduced in 1914, however, it was abolished 65 years later, in 1979. All States also abolished their inheritance taxes by 1982.

 

Superannuation Death Benefits Tax

A significant area of inheritance tax “by stealth” is a deceased person’s superannuation benefits. Superannuation held by a person at the time of their death may include benefits in the accumulation phase, the pension phase, or a combination of both.

When a member of a superannuation fund passes away, their superannuation savings must be cashed “as soon as practicable” following death. Superannuation death benefits can be cashed in two ways:

  1. Payment of a pension to certain eligible beneficiaries – generally to a surviving spouse; and/or
  2. Payment of a lump sum to nominated beneficiaries or to the estate of the deceased.

 

Superannuation law imposes restrictions on the classes of beneficiaries that can receive a death benefit directly from a superannuation fund. A superannuation death benefit paid as a lump sum is tax free when paid to a “dependant” (as defined in tax law). A tax dependant includes:

  • The spouse, or former spouse of the deceased,
  • The deceased’s children under 18 years of age,
  • Anyone with whom the deceased had an interdependency relationship just before they died, or
  • Any other person who was financially dependent on the deceased at the time of their death.

In general terms, adult children, parents, brothers, sisters and grandchildren of a deceased person are unlikely to be a tax dependant of the deceased. When a superannuation benefit is paid to a person other than a tax dependant, we need to determine the components of a deceased member’s death benefit. Tax components may include one or more of the following:

  1. The tax-free component – generally comprises of contributions made to superannuation for which a tax deduction has not been claimed. This includes non-concessional contributions and downsizer contributions.

 

  1. The taxable component (taxed element) – will comprise of tax-deductible contributions (including those made by employers, salary sacrifice and personal tax-deductible contributions) as well as investment earnings on contributions.

 

  1. The taxable component (untaxed element) – will include certain contributions made to an untaxed superannuation fund – generally older style funds for public servants. Life insurance proceeds paid to a deceased member’s account following the member’s death may also give rise to an untaxed element.

 

When a death benefit is paid, the components are taxed in the following manner:

  1. Tax-free component – is exempt from tax.
  2. Taxable component (taxed element) – taxed at 15%.
  3. Taxable component (untaxed element) – taxed at 30%.

 

If a superannuation fund pays a death benefit directly to a beneficiary, rather than to the estate, Medicare Levy (2%) is added to the tax rates mentioned above.

 

Should I withdraw my super?

One of the questions often asked, particularly when it is likely that super will pass to non-tax dependants such as adult children, is whether super should be withdrawn as a lump sum while they are still living?

At the end of the day, managing superannuation in our maturing years will depend on several factors including:

  1. Who is the likely beneficiary – a tax dependant or a non-tax dependant?
  2. What are the components of the superannuation benefit – tax-free, taxable, or a combination?
  3. What tax is likely to be payable if superannuation is withdrawn and is invested outside the superannuation system?
  4. What is the member’s current health status and longevity outlook?

 

Unfortunately, there is no simple answer to avoiding tax payable on superannuation death benefits, however, there are strategies that can be drawn upon to minimise tax. As every person’s situation will be different, seeking advice from a licensed financial adviser is imperative.

Please call me on 08 8378 4000, if you would like to discuss your personal situation in further detail.

Author
CFP® | BSc(Ma) | Authorised Representative No. 301739

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