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Super, death, and taxes

An interesting finding in the federal government's Retirement Income Review report is that many Australians are dying with the majority of the wealth they had when they retired.

   

Having enough superannuation to enjoy a financially comfortable lifestyle in retirement is the aspiration of most Australians.

As the super system continues to mature, and with the benefit of compounding investment returns, average retirement savings balances are rising.

But an interesting finding in the federal government's just-released Retirement Income Review final report is that many Australians are dying with the majority of the wealth they had when they retired.

Concerned about outliving their superannuation savings, the report found that the majority of retirees tend to spend less rather than use financial products to better manage their longevity risk.

In other words, rather than wanting to spend up, many retirees are keen to watch their savings balance grow.

And that's pointing towards a huge blow-out in the payment of super death benefits, which actuarial firm Rice Warner projects in the Retirement Income Review report will rise from the current level of around $17 billion per annum to just under $130 billion by 2059.

Projected value of superannuation death benefits


Unintended consequences

When there's superannuation still left over at the end of your life, it's most commonly inherited by your surviving spouse or children, or bequeathed to other nominated beneficiaries.

If you don't have a spouse, and intend to leave your super to your adult children, there may be serious tax consequences for them.

It all comes down to whether your beneficiaries are entitled to access your super funds tax free or not after you're deceased.

So, having an understanding of the tax rules around super death benefits is extremely useful. With proper estate planning before you die, it may be possible to reduce your after-death super tax liabilities.

The tax rules around super death benefits

While there is no formal inheritance tax in Australia, super death benefits are taxed in some cases.

Essentially, superannuation can only be passed on tax-free when it is left to a spouse or dependant children under the age of 18.

A death benefit dependant, as determined by the Tax Act, can also include de factos, former spouses, those with whom you have shared an interdependency relationship immediately prior to death, and others who were financially dependent on you just before you died.

Beneficiaries who fall outside of these parameters, such as adult children, are often caught up in the ATO's tax dragnet.

Superannuation benefits are generally comprised of both taxable and tax-free funds, based on the nature of contributions that have been made over time.

Those contributions made by your employer at the concessional tax rate of 15 per cent form part of the taxable component, while after-tax contributions made by you separately as non-concessional contributions make up the tax-free component.

It's the taxable component – usually where the bulk of an individual's super funds reside – that will carry the tax liability for any adult children receiving your super payout on your death.

Avoiding an after-death tax experience

Transferring super wealth is a non-issue from a tax perspective if you have a spouse or dependant children to leave it to.

If you don't, there are ways to reduce your potential super tax burden for non-dependent beneficiaries.

One of them is through the use of what's known as a super recontribution strategy.

If you've reached an age where you can legally access your funds, this enables you to draw out the taxable component of your super as a lump sum and then recontribute it back into your super fund in the form of after-tax contributions.

Any taxable super withdrawn will be liable for tax at your marginal tax rate, however if you are aged over 60 and have stopped working (are retired) then your marginal tax rate is effectively zero.

Current laws allow individuals to contribute up to $100,000 per financial year as non-concessional (tax-paid) contributions, or up to $300,000 in one year using what's known as the three-year bring forward rule.

Keep in mind however that there are restrictions on personal super contributions for those aged 67 and above.

Using a recontribution strategy can effectively reduce or eliminate the taxable portion of your super, meaning non-dependant beneficiaries of your super may not have to pay any tax if it's received as a lump sum after your death.

Careful planning

When you're looking at who you want to leave your super to, it's very important you consider things carefully as some proper planning needs to be done.

Without planning there could be some unexpected and significant taxes bestowed upon your heirs, which could be exacerbated if any life insurance payout from your super fund is made to someone who is not a spouse or dependant.

To discuss your estate planning needs, including around your super death benefits and potential tax liabilities, it's important to consult a licensed financial adviser.

 

 

By Tony Kaye
Senior Personal Finance Writer
Vanguard Australia
01 Dec, 2020


David Forrest Download David's Adviser Profile

David Forrest

Director
BEc (Acc), MBA, CPA, FFin

David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.

David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.

Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.

David maintains a strong personalised client service focus, providing tailored solutions for clients.

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David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Michelle Forrest

Michelle Forrest

Business Finance Manager
B Bus (Acc), CPA

Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.

Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.

With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.

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Darren Chalk Download Darren's Adviser Profile
Natasha Bartlett
Kelly Collins
Jasmine Smith

Jasmine Smith

Client Service Manager

Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.

Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.

Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.

Jasmine has gained her Certificate III in Financial Services qualification.

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Merrilyn Smith

Senior Client Service Manager

Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.

Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.

Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.

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