Summary: A married couple with sufficient income from investments who will not need their super to live on when one of them dies may plan to forward the assets to the survivor and then in turn to their children. This would work in theory if the super were paid to the surviving dependant member as a lump sum and proceeds distributed equally to the children.
Key take-out: The success of this strategy depends on the surviving member acting in accordance with the deceased’s wishes and it’s worth seeking professional advice to ensure both members of the couple have their wishes fulfilled.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
Preparing for a trustee’s death
In my last column I answered a question from a subscriber about a sole shareholder trustee dying without a binding death benefit nomination (see Tax with Max: Comparing aged care providers, August 19). In my answer I touched briefly on the taxation of superannuation proceeds passing to a non-dependant. Unfortunately in providing this brief explanation I made two mistakes.
The first was a typographical error relating to the amount of tax paid when superannuation passes to a non-dependant. I stated that the amount of tax paid was 17.5 per cent. The amount of tax payable is made up of two components being 15 per cent income tax plus the Medicare Levy. Prior to July 1, 2014, when the Medicare Levy was 1.5 per cent, the tax payable was 16.5 per cent. From June 30, 2014 the Medicare Levy has increased to 2 per cent resulting in tax payable of 17 per cent.
My second mistake was covering the taxation of superannuation payments too simply. To correct this I will now give a full explanation of the taxation of superannuation benefits.
The taxation of superannuation benefits depends on how the benefit is paid, the type of super benefit received, and the age of the person when they receive the benefit. The two ways in which a superannuation benefit can be paid are as a lump sum, either as cash or by receiving an asset in place of cash, or as a series of pension payments.
There are also two types of superannuation benefits. The first type is taxable benefits that result from concessional super contributions and accumulated income credited to a member’s account. Concessional contributions are those amounts that a superannuation fund receives where a tax deduction or concession has been received. These include compulsory superannuation guarantee contributions from employers, salary sacrificed as extra super contributions, and self employed tax-deductible super contributions.
The second is tax-free benefits that predominantly result from non-concessional after-tax super contributions. Tax-free benefits can also result from small business capital gains tax exempt contributions, personal injury payments, Commonwealth government co-contributions, and spouse contributions.
The balance of a person’s tax-free super benefits can only increase when a member is in accumulation phase as a result of further non-concessional contributions being made. Once a member commences a pension the value of tax-free benefits can increase because the tax-free percentage component of a pension remains the same for the life of the pension.
When tax-free benefits are received, as lump sums or as part of pension payments, no tax is payable. This is also the case when tax-free benefits are received upon the death of a member by non-dependant beneficiaries due to a binding death benefit nomination payment.
When taxable benefits are received either as lump sums or pension payments no tax is payable by the member if they are 60 or older. If lump sums are received by someone under 60 that has reached preservation age the first $195,000 is tax free for the 2016 financial year. Lump sums over this threshold are taxed at 17 per cent. If a member receives lump sums when they are under preservation age tax is paid at 22 per cent.
Taxable pension benefits received by someone under 60 but over preservation age are taxed at the applicable marginal rate, but a 15 per cent tax offset applies that results in a net tax rate, including the Medicare Levy, of between 6 per cent and 34 per cent. Taxable pension benefits received by someone under preservation age are taxed at the applicable marginal tax rate without any tax offset.
The way tax is paid on lump sum payments, to non-dependant beneficiaries such as adult children, upon the death of a member, therefore depends on the components of the payment. Tax-free benefits received in this situation have no tax paid on them. Taxable benefits received have 17 per cent tax and Medicare paid on them.
Estate planning for super
My wife and I are second time round but have been married for 25 years. We are 70 and 72 and have kept our assets separate such as super and private shares. We both have non lapsing deeds of nomination held by MLC with the SMSF dollars to be forwarded to the survivor and then they in turn distribute equally to in my case two adult sons and my wife’s two sons and two daughters.
We both have sufficient income from investments and will not need the super to live on when one of us dies. Am I correct in assuming that this means the withdrawal of the super upon the death of one of us can be done without any tax being paid? We have both set our intentions to the family and all are happy with the proposed plan.
Answer: What you are proposing would work in theory as, if I understand you correctly, upon the death of either you or your wife the superannuation must be paid to the surviving dependant member as a lump sum, and then the proceeds from that superannuation payment are distributed equally among your six children.
Unfortunately the success of your strategy, to avoid your non-dependant children paying tax on any taxable benefits received by them, depends on who is the surviving member acting in accordance with the deceased’s wishes. You should seek professional advice from a solicitor that specialises in estate planning issues to ensure what you both want happens.
Accessing the age pension while paying off a mortgage
I am 65, married and will retire in a few months. My wife is much younger and has never worked. Our super assets are in shares and bonds and worth $900,000 and we are about to build a new home with a $300,000 mortgage. We are earning about $60,000 a year from our investment assets. How would splitting our super assist in us trying to access some form of a pension and considering the mortgage would this be considered as owning our home outright? If we did split our super, what pension would we be able to claim?
Answer: One of the only assets that is not counted by Centrelink when assessing eligibility for the age pension is the main residence. Because the home is not counted under the assets test any loans secured against the property are excluded.
This means the $300,000 mortgage to build your new home cannot be used to reduce the value of the assets counted by Centrelink to increase your eligibility for the age pension. The interest you will be paying on the mortgage cannot also be used to reduce the income earned on your investment assets.
In addition to the assets test you must also pass the income test. Under the income test a deeming rate of income earned will be applied to all of your financial assets, including superannuation pension accounts commenced after January 1, 2015.
The age pension that you receive will depend on which of the tests produce the least amount of age pension receivable. You have a number of tax and retirement planning options that you should consider that could result in you maximising the age pension that you receive. Before taking any action you should seek advice from a professional that specialises in this area so that all of your options can be considered.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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