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Have you ever thought about the amount of tax your adult children would have to pay when they get your super benefit. Do you know, that when a member dies, if the spouse or child under 18 receives all their Super, there is no Death Benefits Tax. However, If the death benefits are paid to a non-tax dependent there is a 15% tax plus 2% Medicare levy which has to be borne by the beneficiary. Examples of non-tax dependents could be an adult child or an estate (where ultimate beneficiaries are not the spouse or a child under 18). This tax is ultimately borne by the dependents. Is there any way to reduce this tax?
LET'S UNDERSTAND HOW?
Converting your taxable and tax-free component proportion
Withdrawing the funds from super before the member passes away*.
Recontributing them via non-concessional contributions by using the maximum cap ($360,000) with bring forward provision**.
Example:-
Adam has $900k in super which is made of 80% taxable ($720k) and 20% taxfree ($180k).
When this $900k is distributed to your adult children, the taxable portion i.e. $720,000 will be taxed at least at 17% which will result into the tax of ~$122k and the remaining $180k will be taxfree. Lets understand how we can reduce this tax by changing the super components?
Adam takes out $360k which will be 80% from taxable ($288k) and 20% from taxfree ($72,000). Now when Adam contributes $360,000 using bring forward provision, this will directly be added to tax-free components increasing the taxfree balance from $108k to $468,000. This whole exercise will change the components to 48% taxable and 52% taxfree. In this case, the Adam’s beneficiary might just have to pay 17% tax on $432,000 as the remaining balance has changed into tax free. This can save upto approximately $49k in tax for the ultimate beneficiary.
Key considerations while going for above strategy
*Your eligibility for making the super withdrawals and the maximum withdrawal amounts.
**Maximum contribution limits based on your age and super balance TSB.
If you would like to know more about Super Death Benefits Tax, please visit https://www.ato.gov.au