It is often said that you can’t avoid death or taxes, and believe you me; never a truer word has been spoken. Under current Australian superannu- ation law, accumulated benefits left to a financial dependent are usually treated as being tax-free.
Therefore, when it becomes your time to transcend to a ‘higher place’, you at least have comfort in the knowledge that the ‘fruit of your loins’ will take possession of your accumulated wealth, gratis of any further lien in the form of taxation.
Unfortunately, it is not until you take a closer look at the rules of superannuation that you suddenly see our Government has set us a rather cunning trap with a super tax on death.
The super tax is determined by the financial dependent definition. Common belief has your spouse and children as your obvious dependants. Thus, they would be recipients of your tax-free super funds when you die. And yes, your spouse, children under 18 as well as any person with whom you may have an interdependency relationship, all fall under the financial dependency definition and 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’ a super tax of 17%.
That’s $17,000 for every $100,000 bequeathed to them. Now there are some exceptions to this super tax.
- All benefits left to a disabled child
- Any children under 25, classified as being a financial dependent.
- The ‘child under 25’ exemption is to recognise situations where a child is in full-time study and living at home.
What can you do to get rid of the super tax?
So what can be done to eliminate the super tax? The good news is there are a number of ways of getting rid of the tax.
Firstly, a quick look at the types of contributions that make up your superannuation balance. There are two types concessional or non-concessional.
Concessional Contributions
These contributions are taxed at 15%
- Compulsory super payments (SG) made by your employer
- Salary sacrifice contributions
- Any costs your employer can pay on your behalf, such as super administration fees and insurance premiums
- Some personal contributions, such as a self-employed person making a contribution and claiming a tax deduction.
Caps for concessional contributions
For the 2016–17 financial year the general concessional contributions cap for those younger than 50 years old in the 2016–17 financial year is
$30,000. However, if you turn 50 years or older in 2016–17 you can contribute up to $35,000 before you may have to pay extra tax.
Non- concessional contributions
The non-concessional component is the after-tax contributions.
- Personal contributions made and not claimed as an income tax deduction.
- Contributions your spouse makes to your fund on your behalf (unless your spouse makes the contributions because they’re your employer)
- Excess concessional contributions you have not elected to release from your super fund
The non-concessional cap is $180,000 for 2016–17.
Of the two components, the concessional component is the problem. All non-concessional contributions remain tax-free going in and out from the fund. Therefore to eliminate the super tax obligation you must eliminate the concessional component. Here’s how you can do it.
Withdrawal and re-contribution – the solution to your super tax problems.
To avoid creating confusion around withdrawal limitations I am assuming any withdrawal is done after age 60.
A common strategy to extinguish the super tax liability is a ‘withdrawal and re-contribution”. Which involves withdrawing your super balance, and immediately depositing back into your fund. (after age 60 of course)
This transaction changes the ‘nature’ of your funds from tax obligated (concessional) to totally tax-free (non-concessional). It also keeps your funds within the super system so you can continue to enjoy its tax-free earnings. The difference now though, when you die, no non-dependent tax (super tax) Bingo, problem solved.
Now before you rush to organise 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 also would apply to any re contribution amount.
As well, you also need to be within contribution age limits, so professional advice is an absolute must. Otherwise, you could end up shooting yourself in the foot with a lot more to worry about than a super tax.
For those who fall outside any limits, there are certainly other strategies you can adopt to eliminate the super tax. For example, you can simply withdraw the balance of your super and invest the funds in your choice of investment. Always discuss alternative actions with a licensed professional prior to taking action. I can’t stress this enough.
So there you have it, a tax trap concealed in superannuation, who would have thought. Luckily you can avoid it, so check your fund and most certainly get some professional advice on the subject.
By the way, who said, you can’t avoid death or taxes, one out of two isn’t so bad?
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