Could your superannuation balance trigger a tax cost for the next generation?

During our working life we are encouraged to fund our superannuation as much as possible to save for and fund retirement. While this is generally considered to be a positive financial decision, it is worth noting that when the time comes, superannuation may not be the best vehicle for intergenerational transfer of wealth. Having a large superannuation balance at death can result in adverse tax outcomes for the next generation.

Often when a spouse dies, some or all their superannuation benefits are transferred to the surviving spouse without a significant amount of taxation implications. This is due to them being ‘tax-dependent’. However, when a surviving spouse dies, and the ultimate beneficiaries of a superannuation lump sum death benefit payment are adult children that are ‘non-tax dependents’, a tax liability is likely to arise. The tax liability will be up to 15% on the taxed element; and up to 30% on the untaxed element of the superannuation lump sum. It is worth noting that if the superannuation lump sum payment includes proceeds from a life insurance policy, this would generally result in a higher amount of tax payable due to the creation or increase of the untaxed element. This is because each member’s superannuation elements are unique to them and based on contributions and events during their lifetime. It should be noted that upon death there is nothing that can be done to change these elements.

In a perfect scenario, a member’s superannuation balance would be reduced throughout their lifetime (in one way or another) in such a way that it is $0 on death. This, of course, is not realistic.

Subject to a member’s eligibility to access part or all their superannuation balance, and be able to make contributions under the non-concessional cap at the same time, a valid strategy to reduce tax on death to dependents is to withdraw and recontribute funds. The recontributed funds will be paid tax free to non-tax dependent adult child beneficiaries on death.

Superannuation members that have a pension interest are required to withdraw a minimum amount of funds annually, based on their age. Subject to the specifics of the situation, withdrawing more than the minimum amount would result in a lower superannuation balance at death, thus reducing the tax to dependents. If the additional funds drawn are not consumed, they could be invested and may not attract any tax up to the tax-free threshold of $18,200 per person (without considering rebates and offsets that may apply).

To avoid any tax liability to non-tax dependents on death, a member who is close to their life expectancy may be better off accessing their full superannuation balance tax free. This will then become a personal asset of theirs and pass on death to their estate at no tax cost. (If left in super there would likely be a tax liability to non-tax dependents.) In this case the saving of tax on death should be weighed up against any additional personal income tax that may be payable on a higher value of personal assets, and any impact on social security tests.

Overall, be aware of the taxed and untaxed elements of your superannuation balance, regardless of whether you have tax dependents or non-tax dependents. Then explore what can be done in your lifetime to reduce passing on a tax cost to the next generation. There can be many matters to consider in this area, speak to your local Accru adviser today.

About the Author
Brendan Watson , Brisbane
Brendan started his professional career in 2003 in North Queensland, working for a variety of clients and completing his professional qualifications. He moved to Brisbane and joined Accru Rawsons in 2010, becoming a Partner in 2015.
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