Death taxes on superannuation are a concern for many Australians, but with the right knowledge, they can be managed or even avoided. This article delves into what the death tax is and offers strategies to mitigate its impact.
The death tax refers to the tax imposed on the taxable component of your superannuation when you pass away and it’s left to a non-dependent, such as adult children. This tax is usually 15% plus the Medicare levy.
Your super balance is split into two parts: the taxable component and the tax-free component. The taxable part is generally made up of employer contributions and earnings, while the tax-free part comes from after-tax contributions.
The re-contribution strategy is a savvy financial move for those looking to minimize the tax impact on their superannuation for their beneficiaries. It’s a two-step process that involves both withdrawing and then re-contributing money into your superannuation fund.
Initially, you start by withdrawing a portion of your superannuation funds. This step requires careful consideration, especially regarding the timing and amount. The amount withdrawn will typically come from both the taxable and tax-free components of your super, based on their proportions at the time of withdrawal.
After withdrawal, you then re-contribute a portion of this money back into your super fund as a non-concessional (after-tax) contribution. This type of contribution does not attract the contributions tax that concessional (pre-tax) contributions do, which means it goes into your super account as a tax-free component.
By converting part of your super from a taxable to a tax-free component, you’re effectively reducing the future tax liability on your superannuation fund when it’s eventually passed on to non-dependents. The more you convert to the tax-free component, the less your beneficiaries will have to pay in death taxes.
An integral part of this strategy involves the bring-forward rule, which allows you to make three years’ worth of non-concessional contributions to your super in a single year without incurring extra tax. This is particularly useful if you’re trying to quickly increase the tax-free component of your super.
It’s crucial to keep in mind the balance cap for non-concessional contributions. As of the last update, an individual is allowed to bring forward up to three years of non-concessional contributions, provided their total super balance is below a certain threshold at the end of the previous financial year.
The superannuation environment is subject to change, both in terms of legislation and individual circumstances. Regularly reviewing your strategy with a financial advisor ensures that you are making the most of the current laws and that your superannuation is optimized for tax-effectiveness.
While the immediate benefit of the re-contribution strategy is clear, it’s also worth considering its long-term impact. Not only does it reduce the taxable component for potential death taxes, but it also impacts the tax payable on withdrawals by the super fund member in retirement, potentially increasing the tax-free income they receive.
Avoiding the death tax on superannuation requires careful planning and strategic actions. By understanding the components of your super and utilizing strategies like withdrawal and re-contribution, you can significantly reduce the tax burden on your beneficiaries. Always consult with a financial advisor to navigate the complexities of superannuation law and to tailor a strategy to your unique situation.