Minimising the super death taxes through educated estate planning

Jun 05, 2022
Here's some guidance on how to manage super death taxes through educated estate planning. Source: Getty

Most people are unaware that their superannuation balances contain a taxable component and a tax-free component and that the composition of these balances can have significant effects from an estate planning perspective.

Most people are also unaware of recent changes to the super rules that can actually assist in reducing the incidence of tax on death.

Let’s look at a situation to explain how this works.

Helen is age 67, single, and is the sole member of her self-managed superannuation fund. She is also the sole director of the company that acts as the trustee of her fund. She recently retired and has commenced an account based on her balance of $1,100,000. The components of her super balance are currently:

Helen has completed a binding death benefit nomination to the effect that in the event of her passing all of her superannuation benefits will pass to her legal personal representative and be dealt with in accordance with her Will. Her three children will benefit equally from her estate.

In the present circumstances, her estate would be liable for $135,000 of tax on the taxable component…a rather hefty death tax! This is 15 per cent of the taxable component of $900,000. As the name suggests there is no tax payable on the tax-free component.

This situation would not arise if Helen was married as the tax does not arise when benefits pass between spouses or other financially dependent persons. It would however happen when the surviving partner dies and benefits pass to their respective estate. So what can Helen do about this?

She could make sure she had spent all the money before she passed away and there would be nothing for the tax man. Not really a good option! Or, a better option would be to do some planning to assist her estate and children.

Under the super rules of a few years ago, to make super contributions after 65 years of age Helen would have needed to meet a work test. This required that she work at least 40 hours in a consecutive 30 day period in a financial year in gainful employment before making the contributions.

This test more recently changed to age 67 and from July 1, 2022, it will change to age 75. This means that Helen would not need to meet a work test to make contributions right through to age 75.

Also under the super rules, benefits become fully accessible by age 65. So Helen, if she wanted to, could access the whole $1.1m. So let’s say Helen withdrew $110,000 of her benefits pre June 30, 2022. As she is over the age of 60 there is no tax on the benefit.

Under the current super rules, she decides to make a contribution to super pre June 30 as a non-concessional contribution. As she does not receive any tax deduction relating to the contribution, the new account would be 100 per cent tax-free and she could start a second account-based pension with that amount.

When the new rules come in on July 1, 2022, Helen withdraws another $330,000 (as she would be allowed to do) and makes a non-concessional contribution of that amount to her fund, and starts pension number three. This account would be fully tax-free. By making this size of the contribution she cannot make a further contribution for the following two financial years.

In three years’ time Helen does the same thing. Her total accumulated non-concessional contributions by that time would be $770,000. The components of her super balance would then be (ignoring any growth on the money):

If she then passed away, her estate would be liable for $115,500 less tax than it would have paid had she not undertaken the estate planning strategy. A big difference!

If Helen was married and she and her partner were both members of the fund, it would be very worthwhile for them to get some advice about these types of strategies, and potentially one partner might withdraw some money and the other person may contribute it to the fund.

This might be for the dual purpose of evening up super benefits (as a future legislation risk mitigation) and also to benefit their estate planning. As with a lot of things relating to super, the rules are quite complex and getting informed advice is very important.

For example, the ability to make contributions to super can have limitations depending on a person’s Total Super Balance. This is the amount you have in super at the end of the previous financial year.

The type of strategy outlined for Helen above works best where her Total Super Balance was less than $1.48m.

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