Min­imis­ing su­per death tax

There are strate­gies to en­sure your chil­dren get the max­i­mum ben­e­fits

Money Magazine Australia - - CONTENTS - Vita Palestrant was the edi­tor of the Money sec­tion of The Sydney Morn­ing Her­ald and The Age and has won sev­eral pres­ti­gious jour­nal­ism awards here and over­seas.

Many baby boomers have ac­cu­mu­lated big bal­ances over the 2½ decades since su­per’s in­cep­tion. Their su­per may be ap­proach­ing, or even ex­ceed, the value of the fam­ily home. But un­like the home, which is free of death taxes, su­per’s 17% death tax ap­plies to adult chil­dren.

There are, how­ever, strate­gies to re­duce its im­pact. But first you need to un­der­stand which ben­e­fi­cia­ries will be taxed, how they will be taxed and what you can do about it.

Ba­si­cally, no tax is payable on death ben­e­fits given to a spouse, de facto, same-sex part­ner, some­one fi­nan­cially de­pen­dent on you, a child un­der 18 (or older if a fi­nan­cially de­pen­dent stu­dent), or some­one you have an in­ter­de­pen­dency re­la­tion­ship with. The rest get taxed.

“All your money go­ing into su­per is bro­ken down into a tax­able com­po­nent and a tax-free com­po­nent,” says Colin Lewis, head of strate­gic ad­vice at Per­pet­ual Pri­vate. “Your tax­able com­po­nent is made up of all your pre-tax con­tri­bu­tions: your em­ployer’s su­per guar­an­tee, any salary sac­ri­fice you make, or any con­tri­bu­tion you have claimed a tax de­duc­tion on. All the earn­ings in the fund form the tax­able com­po­nent.

“The only por­tion that is tax free is your after-tax non-con­ces­sional con­tri­bu­tions. So when we are talk­ing about how much death ben­e­fit tax ap­plies, it’s on ev­ery­thing in the fund other than your non-con­ces­sional con­tri­bu­tions.”

Tax payable on the tax­able com­po­nent is at a rate of 15% plus the 2% Medi­care levy. Lewis says even if the ben­e­fit is paid through the de­ceased’s es­tate, the adult son or daugh­ter are still sub­ject to the death tax but not the 2% Medi­care levy.

One com­mon strat­egy to min­imise the tax is to with­draw an amount from su­per and re­con­tribute it as a non-con­ces­sional con­tri­bu­tion. By do­ing this you are con­vert­ing the tax­able com­po­nent into a tax-free com­po­nent. But the rules are com­plex.

Gen­er­ally, once you are 60 and re­tired (it doesn’t have to be per­ma­nently) you can ac­cess your su­per tax free. At 65 and over, re­tire­ment isn’t a re­quire­ment but to be el­i­gi­ble to make con­tri­bu­tions you must meet a work test.

Laura Men­schik, a cer­ti­fied fi­nan­cial plan­ner and di­rec­tor of WLM Fi­nan­cial Ser­vices says: “Let’s say I’m over 65, I’m still earn­ing a rea­son­able in­come, I could draw out $100,000 and re­con­tribute that back as a non-con­ces­sional con­tri­bu­tion and it goes in tax free. That’s one way of re­duc­ing the tax­able com­po­nent.”

The non-con­ces­sional con­tri­bu­tion could also be made to your spouse’s ac­count, es­pe­cially if you are close to ex­ceed­ing the $1.6 mil­lion su­per cap. “It might be a strate- gic plan to even out both bal­ances,” says Men­schik.

It all comes down to whether you’re el­i­gi­ble to take out a lump sum and then whether you are el­i­gi­ble to re­con­tribute it, says Lewis. “You have to be mind­ful, first of all, if you are el­i­gi­ble to re­con­tribute, that is, put the money back into su­per – you are un­der 65, or over 65 and meet the work test. And se­condly, how much can you put back in. You’ve now got to be care­ful of lower non-con­ces­sional con­tri­bu­tion caps, which have dropped from $180,000 to $100,000.

“Peo­ple who have over $1.6 mil­lion in su­per are also no longer able to do the re­con­tri­bu­tion strat­egy. If your to­tal su­per bal­ance is $1.6 mil­lion or more, then you can’t make an after-tax con­tri­bu­tion to su­per,” says Lewis.

Other strate­gies in­volve pulling money out of su­per. “If a per­son has an in­jury or ill­ness, it might be a heart at­tack and they are to­wards the end of their life, the best strat­egy for a whole host of rea­sons is to sell down the port­fo­lio and trans­fer all the ben­e­fits out of su­per to their per­sonal bank ac­count. It’s then paid out to the ben­e­fi­cia­ries as per the dis­tri­bu­tion of their will and there is no tax,” says Men­schik.

Or you could leave ev­ery­thing to your spouse. “From a tax view­point if you’ve got a spouse and adult kids and you want them all to ben­e­fit, you’re bet­ter off giv­ing it to your spouse and let­ting them pay it out tax free,” says Lewis. “The is­sue comes when you’ve got blended fam­i­lies. Can you trust your spouse to pay what­ever you wished for the chil­dren of your for­mer re­la­tion­ship?”

And if you don’t have a huge amount in su­per it might be sim­plest to with­draw it. Lewis says a cou­ple over 65, qual­i­fy­ing for the senior and pen­sioner tax off­set, can earn $28,974 a year each tax free. See ta­ble.

Given the com­plex­ity of the rules, it’s vi­tal you get pro­fes­sional ad­vice first.

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