Australia does not have an inheritance tax, but several taxes are triggered by a person’s death, including the superannuation death benefits tax. This tax is becoming increasingly relevant as people live longer and accumulate more wealth. However, it is often overlooked because it is not frequently payable.

The tax liability arises when the super balance is to be paid upon death to adult children or other non-dependant beneficiaries. In this case, recipients will need to pay a tax of 15 per cent on the “taxed component” of the amount they receive. This could be up to $150,000 per $1 million paid out, plus Medicare levy of a further two per cent. The Medicare levy can be avoided if the lump sum death benefit is instead paid to the deceased’s estate, as estates don’t use the Medicare system.

The following table illustrates the tax rates applicable when superannuation death benefits are paid as a lump sum:

Withdrawal and Re-contribution Strategy

A re-contribution strategy is a withdrawal of your superannuation benefits and a re-contribution back into super. This strategy converts all or part of the taxable portion of your superannuation benefit into a tax-free component. Ultimately, this may result in a reduction of the potential tax payable if your super is passed onto certain beneficiaries following your death.

This strategy can only be implemented if you are able to meet a condition of release to access your superannuation benefits and also eligible to make a contribution into superannuation. The strategy is effective under the following circumstances:

• Income tax perspective: A re-contribution is still beneficial for those aged between preservation age (from age 58) and age 60 and who are expecting to receive a superannuation income stream.
• Estate planning perspective: This strategy can also be utilised where there is some likelihood that your superannuation benefits will be received by those not considered to be dependants under taxation law, such as adult children. A re-contribution can reduce the lump sum tax payable from death benefit proceeds, or in some cases, the adult beneficiaries will not be required to pay any tax at all.

The tax treatment of super can be complex so if you need assistance, speak to a financial adviser. It’s always important to consider all the options and implications before making wholesale changes based on one eventuality. Deciding who gets your super when you die isn’t as simple as having a will. That’s because wills typically only cover assets you own personally, whereas super is held in a trust for you by the trustee of your superfund.

To make sure your super and any life insurance you might hold with it goes to the people you’d like it to, you need to keep your super fund up to date by nominating a valid beneficiary. If you don’t nominate a beneficiary, your super fund may decide who receives your super money, regardless of what you have in your will.

When you’re considering who you’re going to leave your super to, it’s important to think about the people who matter most and how tax implications may affect the amount they could receive.