How You Can Avoid Death Tax On Superannuation In Australia

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.



What is the Death Tax?

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.



Components of Your Super

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.



Strategies to Avoid Death Tax


Withdraw and Redeposit

The withdraw and redeposit method is an effective tactic to prevent your superannuation from incurring death taxes, which can significantly diminish the value of the inheritance you leave behind.



Timing Your Withdrawal

The key to this strategy is timing. You’ll want to withdraw your funds while you’re still alive and able to do so tax-free. This typically means taking out the money when you have reached the preservation age and met a condition of release, such as retiring from the workforce.



Redepositing into a Bank Account

Once withdrawn, the funds should be deposited into a personal bank account. This move effectively shields your money from the 15% death tax plus Medicare levy that can be charged to a non-dependent inheritor of your superannuation.



Legal Considerations and Protections

It’s important to do this while you’re in good health. If there’s a sudden downturn in your health, you might be unable to perform this withdrawal and redeposit operation. That’s where legal forethought comes into play.



Creating an Enduring Power of Attorney

An enduring power of attorney is a legal document that allows you to appoint someone you trust to manage your financial affairs if you’re unable to do so. This appointed person can then execute the withdraw and redeposit strategy on your behalf, ensuring that your funds remain protected even if you’re incapacitated.



Consulting with Professionals

Due to the potential complexities and legal ramifications, it’s recommended to consult with both a legal and financial advisor before setting up an enduring power of attorney and executing the withdraw and redeposit strategy. These professionals can help ensure that the process is handled correctly and in line with your wishes.



By thoughtfully applying the withdraw and redeposit method and securing an enduring power of attorney, you can significantly reduce the tax burden on your superannuation funds, ensuring that your beneficiaries receive the maximum benefit from your life’s savings.


The Re-contribution Strategy

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.



Step 1: Withdraw from Your Super

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.



Step 2: Re-contribute as a Non-Concessional Contribution

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.



Benefits of Converting to 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.



Utilizing the Bring-Forward Rule

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.



Maintaining Balance Caps

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.



Regular Reviews and Adjustments

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.



Long-Term Impact

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.



The Death Tax Avoidance

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.