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Tax Tip 144: Taxation of Super on death

Discussion in 'Accounting & Tax' started by Terry_w, 20th Sep, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Taxation of Super Death Benefits

    When a person dies their superannuation will be paid out to either a dependant or to their estate (and then dealt with by the will or intestacy laws).

    The trustee of the fund will decide who gets the proceeds, subject to any binding directions by the member and/or the terms of the trust deed.

    See my legal tip on this:
    Legal Tip 146: Who can receive your Super when you die? Legal Tip 146: Who can receive your Super when you die?


    There are different taxation consequences for different classes of people receiving lump sum payments of super death benefits.

    Firstly, consider super is made up of 3 different components:
    • Tax Free Component
    • Taxable Component, which consists of:
    o Taxed Element
    o Untaxed Element

    Where the recipient is a tax dependant:
    • The Tax Free Component is tax free to the recipient
    • The Taxable component is not taxed – it is classed as Non-Assessable Non-Exempt income.

    Where the recipient is a tax non-dependant:
    • The Tax Free component is tax free to the recipient
    • The Taxed Element of the Taxable Component is taxed at 15%
    • The Untaxed Element of the Taxable Component is taxed at 30%
    The Medicare Levy will also apply.

    Remember that Adult children (those over 18) will be tax non-dependants.
    Note that there are two definitions of ‘dependants’ for super purposes. One is the Super law definition and the other is the Tax law definition. They are slightly different to each other – an adult child can be a dependant under the super laws but may not be a dependant under the tax laws. This may mean they can receive a payment of death benefits but it will be taxed differently to the payment received by their younger sibling.

    Where the super death benefits are paid to the estate (i.e. via the will or intestacy laws) it will be taxed as above to the extent that the beneficiaries of the benefits will be tax dependants or tax non-dependants. This is why it may be worthwhile considering a Superannuation Proceeds Trust being set up in the will to segregate super death benefits so that these can be paid to tax dependants.
     
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  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There can be many financial strategies that can be used prior to age 65 that can assist to bypass the tax concerns of adult child beneficaries. Contrary to popular opinion super benefits will often be taxed in beneficiaries hands whether its through the estate or direct from the fund.

    The exception is the member non-concessional element which is tax free. The recent backflip by the LNP coalition about the proposed $500K super cap means that these strategies remain, for now.

    Strategies include segregated assets, recontribution strategies and even having two superannuation providers - allowing non-blended member elements. The importance of reversionary pensions is also a long term strategy that can prevent blended benefits and the issue of death beneficts passing too soon. This is especially important when large contributions are proposed say from sale of a business, property etc. Throwing it all into one pot seems logical but can blend all super into a tax concern that cannot be unblended.

    My suggestion is before making large contributions etc is to get financial advice.

    Another issue Terry didnt mention is that of beneficiary avoidance. In some cases it may be desirable that benefits do NOT pass through to intended beneficiaries. For example a adult child undergoing a divorce or bankruptcy proceeding. Trusts can be a good way to ensure that the beneficiary doesnt receive the benefits which they could lose to a spouse or a creditor.
     
  3. Scott No Mates

    Scott No Mates Well-Known Member

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    Life is complex, even in death.
     
  4. Marg4000

    Marg4000 Well-Known Member

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    Are anti detriment provisions still in force?
    Marg
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think they will be gone very soon - July 2017 I think.
     
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Not all funds can or are able to pay them. I certainly dont recommend a scheme to access anti-detriment benefits prior to the proposed end date. :cool:

    AntiD is poorly understood by many advisers who think reserves are needed. Thats not the case and a sign that future taxed cap issues could pose a problem. One of the best ways to use AntiD is to combine older pension members (Parents) with adult kids. However that can open a can of worms and a forced death benefit funded by the younger members sometimes just doesnt work anyway. The reality is death benefits for antD must be cashed. In some cases leaving benefits within the fund as a reversionary pension can offer far enhanced tax outcomes v's an increased sum that now sits outside super taxed a higher rates. AntiD is a bit outdated v's the long term intent of low rate taxation.

    Many industry funds dont allow anti-D as they operate seperate funds for pensions and another for accumulation. SMSF are unique in that they allow accum and pensions to be combined.