What you need to know when you’re investing your money into Superannuation.
Having funds in Superannuation is usually a great financial structure from a tax perspective. Generally during a members’ working life earnings and contributions are taxed at 15%, then in retirement when they start an account based pension, the earnings are taxed at 0% (up to the $1.6 million transfer balance cap). Despite this being a great way to invest your money, there should be an awareness of potential Death Benefits Tax upon the death of a member.
When a member dies, if the spouse or child under 18 receives all of their Super, there is no Death Benefits Tax. If the death benefits are paid to a non-tax dependent, there is a 15%* Death Benefits Tax that applies. Examples of non-tax dependent could be adult children or estate (where ultimate beneficiaries are not the spouse or child under 18). This tax is ultimately borne by the dependents.
How does it work?
Say for example John has $2.1 million in his Super when he died made up of the following components:
**Tax free component: $630,000 (30% of his balance)
***Taxable Component: $1,470,000 (70% of his balance)
The death benefit gets paid out as a lump sum to his estate (beneficiaries will not be his spouse or child under 18).
The taxable component of $1,470,000 will be subject to 15% tax being $210,000. The $630,000 tax free component is received tax free.
Can anything be done to reduce this future tax?
Some strategies may involve:
- Withdrawing all money out of Super just before the member passes away (very rare that this will be possible).
- Completing some withdrawals and re-contributions into the fund to increase the tax free component of the fund (subject to contribution limits/rules and meeting conditions of release to withdraw).
- Withdrawing money out of Super and investing in the individual’s name.
John is 67 years old and has $2.1 million in Super (a 30% tax free component and a 70% taxable component). He is in good health and expects to live for many more years.
He only has about $5,000 worth of other income in his personal name. John withdraws $500,000 from his super and invests in own name. Assuming these funds will earn 5%, that would equate to an additional $25,000 of income.
What are the benefits of John’s action here?
- The $25,000 income would be tax free in John’s name (assuming he’s eligible for the Senior Australian tax offset) as opposed to being taxed at 15% in Super – saving approximately $3750 tax every year.
- Future Death Benefits Tax is reduced because $350,000 (70% taxable component of $500,000) is now in his own name and won’t be subject to Death Benefits Tax upon his passing. This could represent tax saving to his dependents of $52,500.
*when its paid directly to a beneficiary, need to add 2% Medicare levy
** Tax Free component – most of this would come about from non-concessional contributions the member made over their life
*** Taxable component – would be made up mostly of concessional contributions and earnings over the life of the member