Estate Planning – Minimising Super Death Benefit Tax

Michelle Bromley CFP®, Director – Strategy and Advice

While death duties in Australia were abolished in the late 1970’s, some quasi-death taxes remain, including capital gains tax and superannuation death benefit tax. 

On your death, if your superannuation is paid to a ‘death benefits dependent’, such as your spouse or someone financially dependent on you, the benefits are tax-free.

However, a death benefit payment to your financially independent adult child will be reduced by $17,000 per $100,000 of any ‘taxable component’.

A recent change in legislation provides the opportunity for those age 65 and over to discuss the ‘Cash Out and Recontribution’ strategy with your adviser to maximise the benefits that may ultimately flow to non-dependent beneficiaries. 

Eligibility to Contribute Beyond Age 65 

Below age 65 you are free to make personal superannuation contributions, subject to limits known as the Contribution Caps and your Total Superannuation Balance.

Between age 65 – 75, an additional restriction applies allowing only those who can meet the ‘work test’ of at least 40 hours employment in 30 consecutive days, to subsequently contribute.

However, recent changes abolished the ‘work test’ for people aged 65 and 66 and a once-off ‘work test exemption’ can be accessed by people aged 67 – 75* if you met the work test in the previous financial year.

The ability to make contributions for your spouse has also been extended to age 75*.

*the contribution must be made within 28 days from the end of the month of turning 75

Limits on Making Personal Contributions

Your ‘Total Superannuation Balance’ (TSB) is measured at the previous 30 June and is a limit on the amount that you can have in super and still make personal contributions during the current financial year.

  • You can only access the work test exemption if your TSB was less than $300,000 
  • For those aged 65 – 66 or who meet the work test in the current year, after-tax personal contributions can only be made if your TSB was less than $1,600,000.

The super ‘contribution caps’ also apply per financial year, and for those age 65+ are:

  • Concessional (before tax) contributions are limited to $25,000; and
  • Non-Concessional (after tax) Contributions are limited to $100,000

Those aged under 65 can make larger personal contributions of up to $300,000 over a prospective 3-year period. Legislation is currently before Parliament* to extend this bring-forward rule to those aged 65+.  

*At the time of writing this measure is not yet law.

Access to Your Super

You have full access to your super on turning age 65. Below that age, you need to meet one of the ‘conditions of release’ such as retirement, or you can withdraw any ‘unrestricted non-preserved’ benefits if you have them.

The Opportunity to Cash Out and Recontribute

Let’s consider an example.

You turned 65 and retired on 30 June 2020 with $1.3 million in your SMSF. 

Your spouse is age 64, but they’ve not worked for many years, so they don’t have super.

All your benefits are taxable, so if your adult child inherited them now, they would only receive $1,079,000 and the ATO would get $221,000 in death benefit tax.

Your adviser outlines a strategy involving the withdrawal of $500,000 from your super and for you to make the following contributions:

  • $300,000 for your spouse this financial year using the bring forward rule; and
  • $100,000 for yourself this financial year using the annual NCC cap; and 
  • $100,000 for yourself next financial year using the annual NCC cap.

By implementing the Cash Out and Recontribute strategy, you’ve potentially increased your adult child’s inheritance (and decreased the ATO’s tax revenue) by $85,000.

If you have an SMSF, after each recontribution you can ‘quarantine’ the tax-free benefit by commencing a new account-based pension. Using a binding death benefits nomination, you can direct payment of the tax-free pension to your non-dependent adult children, and direct other taxable benefits to a beneficiary who can receive them tax-free e.g. your spouse, minor child or a financially dependent adult child.

What’s Your Scenario?

The above example was straightforward, but everyone has a unique set of circumstances. If you want to explore whether a recontribution strategy might be worthwhile for your family, please contact your adviser for personal advice.

To speak to our client services team, please call 1800 064 959 or click here to contact us.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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