It’s said that you can’t avoid death or taxes. Well, under current superannuation law, accumulated benefits left to a financial dependent are treated as being tax-free. But look a bit closer and you suddenly see a cunning trap set by the Government.
It centres on who exactly is classified as being your financial dependent. Common belief has your spouse and children as dependents and therefore able to receive your super funds tax-free when you die. And yes, your spouse, children under 18 and any person with whom you have an ‘interdependency relationship’, all fall under the financial dependency definition and will qualify as tax-free recipients.
The problem occurs the minute your children turn 18. From then on, they are not considered financial dependents and any super benefit you may leave would be ‘slugged’ at 17% tax rate. That’s
$17,000 for every $100,000 bequeathed to them. Yes, there are some exceptions, disabled children, and children under 25 classified as being a financial dependent e.g. Living at home whilst studying
The most common strategy employed to extinguish any tax liability is called a ‘withdrawal and re- contribution’ This involves withdrawing your superannuation usually after age 60 when it becomes tax-free, and immediately depositing it back into your super fund. This simple transaction has the effect of changing the ‘nature’ of your funds from being tax obligated to totally tax-free on death. Bingo, tax problem solved.
Now before you rush to organize the withdrawal of your super, there are a few complexities that need consideration. For instance, there are limits to the amounts a person can contribute to super which will apply to any re-contribution amount. Additionally, you also need to be within the contribution age limits.
Professional financial advice is an absolute must; otherwise, you could end up shooting yourself in the foot. For those who fall outside of any limits, there are other strategies you could adopt, and these should also be discussed with a licensed professional. By the way, who said, you can’t avoid death or taxes’; one out of two isn’t so bad?
Would you like to learn a bit more about your superannuation, here is a post to get you started – Improving your Superannuation even if you’re not working. Thanks for reading, and I look forward to seeing you again.
