Strategies to avoid a super "death tax"

Summary: None of knows exactly when we'll die, but some careful estate planning can avoid painful taxes after you've departed.

Key take-out: Planning ahead, potentially removing assets from superannuation, can ease the tax burden on non-dependant beneficiaries.

If you don't like donating extra money to the Tax Office, and particularly not after you die, then do I have some news for you.

Unlike many countries, Australia does not have a death tax, per se. Not officially, in any case.

But we do have some rules that act as a de facto death tax, particularly when it comes to superannuation.

The good news is that, for many, there are ways to avoid this. And this will be for almost anyone who doesn't die unexpectedly. (That is, dying of old age has potential benefits.)

Australia's “death tax” rule relates to superannuation, but only under certain circumstances.

If you leave your superannuation death benefits, including any life insurance payouts, to dependants, then no death benefits are payable.

However, if you don't have dependants (I'll come back to the rules on this), then your superannuation will probably be taxed before being handed out to your intended beneficiaries.

The de facto death tax

If your superannuation is left to non-dependants, it will be taxed at either 15 per cent or 30 per cent. That's plus the Medicare Levy, which is currently 2 per cent.

The difference between what rate your death benefits are taxed at is depends on whether the benefits are “taxed” or “untaxed”. Untaxed benefits, usually those provided by government defined benefit funds, are taxed at the higher rate.

Your concessional contributions (superannuation guarantee or salary sacrificed amounts) are considered to be “taxed” super savings and are taxed at the lower rate of tax, if left to non-dependants.

Those super contributions that are considered completely tax free, to dependants and non-dependants, are those contributions that have been put in with after-tax contributions, widely known as non-concessional contributions (NCCs).

These contributions can pass to any beneficiary tax free.

So, who is a death-benefits dependant?

Essentially, your spouse or children under the age of 18. Children over the age of 18 can still be considered dependants, but the testing gets a bit harder.

Death benefit dependants get superannuation death benefits tax free.

If you have children older than 18, then you are largely going to be looking for other solutions to get your superannuation to them tax free.

The solution … if you have advance warning of your death

We don't have warnings when we're being hit by a bus, or going down in a plane crash. Or when we've had one too many pieces of pastrami that causes the heart attack.

But for most who die of old age diseases, you do get some warning.

You need to be aware of this. If you leave your superannuation to non-dependants, it will be taxed. And it doesn't need to be.

Those who might be leaving their superannuation to non-dependents include:

• Where their spouse has pre-deceased them.
• Where their children are over 18.

And that will be quite a percentage of people who die in their 70s and 80s, and potentially earlier.

The best solution? If you know you're about to fall of the perch, then the best solution is to get your money out of superannuation completely.

There is no “death tax” outside of superannuation. So, if you take your money outside of super and have it sitting in your own name at the time of your death … there's no death tax.

You have $4 million in super when you die and no dependants? There will be a death benefit lump sum tax of 17 per cent or 32 per cent of that sum. If that $4 million has been transferred out of super into your personal name the day before you die? Zero per cent tax.

However, if you have $4 million sitting outside of superannuation (for too long), then the income it creates will be taxed at your marginal tax rate for a period (until you die).

This is complex stuff. Partly, it requires you to sit down with a knowledgeable adviser and estate planning lawyer to assist. Part of it will also be to have effective powers of attorney in place - POAs can act on your behalf, in your interest, at any time, but particularly when you're unable to make decisions for yourself. They might have the power to have funds or assets sold down and taken out of superannuation.

Also, most importantly, you have paid the taxes you should have paid on this money. As Kerry Packer once said: “If anybody in this country doesn't minimise their tax, they want their heads read, because as a government, I can tell you, you're not spending it that well that we should be donating extra.”

If you want to avoid giving away a part of the fortune you have in mind for your kids, then put some effort/time/money into proper estate planning for your superannuation.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.