Reducing The Potential Tax Payable By Superannuation Beneficiaries
Reducing the potential tax payable by superannuation beneficiaries
By Rebecca Dhillon
Recently, there has been increasing media coverage of the potential ‘death tax’ payable by beneficiaries upon receiving superannuation benefits. Under current legislation, when the taxable component of an individual’s superannuation benefit is paid to a non–tax dependent beneficiary via their estate, it is subject to tax at a rate of 15%. This tax rate increases to 17% (including the Medicare Levy) when the taxable superannuation benefit is paid to a non–tax dependent directly (and not via the individual’s estate).
A tax dependent includes:
- The deceased’s spouse or de facto spouse
- The deceased’s former spouse or de facto spouse
- A child of the deceased under 18 years old
- A person financially dependent on the deceased
- A person in an interdependency relationship with the deceased
The taxable component of your superannuation balance is made up of contributions where the contributor claimed a tax deduction, i.e., employer super guarantee, salary sacrifice, and personal concessional contributions. The tax-free component comprises contributions made with after-tax monies, i.e., non-concessional and downsizer contributions.
One of the simplest methods of reducing any potential tax payable by a non–tax dependent is to implement a recontribution strategy with your superannuation benefits. This strategy can only be utilised by an individual who has met a condition of release. Conditions of release include reaching preservation age and retiring, ceasing an employment arrangement on or after age 60, or reaching age 65 (even if you haven’t retired).
A recontribution strategy involves an individual withdrawing part or all of their superannuation balance and re-contributing the funds back into the superannuation environment as a non-concessional contribution, thereby increasing the tax–free component of their superannuation benefits.
When withdrawing funds from superannuation, they are drawn proportionately from the taxable and tax-free components of your benefits; i.e., you cannot nominate to withdraw only funds from the taxable component of your superannuation balance.
Non-concessional contributions can be made by individuals up to the age of 75, provided their total super balance is below $2 million as of June 30 of the previous financial year. An individual can contribute up to $120,000 in a single financial year as a non-concessional contribution (the maximum cap), or $360,000 in a single financial year by ‘bringing forward’ the next two years’ contribution limits.
The effectiveness of the strategy can be illustrated through the following case study.
Case Study
Leo (70) has $850,000 in super. Seventy per cent of his superannuation benefit is taxable, and 30 per cent is tax–free. His wife Sophie (68) has $625,000 in super. Eighty per cent of her super benefit is taxable, and twenty per cent is tax–free.
Leo and Sophie both have a Binding Death Benefit nomination in place for their superannuation benefits, to be paid to their three adult children via their estate upon their death.
The table below shows the tax payable by their nominated beneficiaries if they received the super benefits, based on the current component breakdown:
Leo
| Super Benefit Payable | Tax Payable by Beneficiaries | Net Super Benefit Received | |
| Taxable Component | $595,000.00 | $89,250.00* | $505,750.00 |
| Tax–Free Component | $255,000.00 | NIL | $255,000.00 |
| TOTAL | $850,000.00 | $89,250.00 | $760,750.00 |
Sophie
| Super Benefit Payable | Tax Payable by Beneficiaries | Net Super Benefit Received | |
| Taxable Component | $500,000.00 | $75,000.00* | $425,000.00 |
| Tax–Free Component | $125,000.00 | NIL | $125,000.00 |
| TOTAL | $625,000.00 | $75,000.00 | $550,000.00 |
*15% of the taxable component.
Leo and Sophie’s beneficiaries would receive a combined benefit of $1,310,750 after paying tax of $164,250.
Let’s assume Leo and Sophie implement a recontribution strategy, each withdrawing $360,000 from their superannuation benefits and re-contributing the funds to superannuation as non-concessional contributions in the same financial year. In doing this, they will trigger the ‘bring forward’ rule and will be unable to make further non-concessional contributions into super for the next two financial years.
As shown in the table below, implementing the re-contribution strategy will increase the combined benefit received by beneficiaries to $1,391,750 and reduce the potential tax payable by beneficiaries (saving $81,000).
Leo
| Super Benefit Payable | Tax Payable by Beneficiaries | Net Super Benefit Received | |
| Taxable Component | $343,000.00 | $51,450.00* | $291,550.00 |
| Tax–Free Component | $507,000.00 | NIL | $507,000.00 |
| TOTAL | $850,000.00 | $51,450.00 | $798,550.00 |
Sophie
| Super Benefit Payable | Tax Payable by Beneficiaries | Net Super Benefit Received | |
| Taxable Component | $212,000.00 | $31,800.00* | $180,200.00 |
| Tax–Free Component | $413,000.00 | NIL | $413,000.00 |
| TOTAL | $625,000.00 | $31,800.00 | $593,200.00 |
*15% of the taxable component.
Furthermore, as individuals can make non-concessional contributions up to age 75, there is the potential for Leo and Sophie to implement this strategy again in the future, once their non-concessional caps reset (as they have triggered the ‘bring forward’ rule).
Recontribution strategies are an effective way to increase the tax–free proportion of your superannuation benefits, reducing or even eliminating any tax payable by non–tax dependent beneficiaries in the future. This ensures more of your superannuation benefits pass to your nominated beneficiaries after your death.