Our theme this month is estate planning, and so we thought we would start with a quick article about what happens to your super when you die. We know, it sounds grim, but it’s going to happen to all of us and most of us want to die with some money left or may have a significant sum in super from the payout of a life insurance policy!
When it comes super, you are usually not the legal owner of your superannuation benefits. Distribution upon death is not governed by your will. Rather, superannuation assets tend to be owned by a trustee. This is why it is a great idea to establish a ‘binding death benefit nomination’ for your superannuation. This will direct the trustee on how to pay out your superannuation death benefits.
Superannuation is complex. One of the complexities is what happens to your death benefits from a tax perspective. Basically, whether these benefits are subject to tax depends on two things: the nature of the benefits; and the nature of your relationship with the person who eventually receives them.
If the person who receives your benefits is a ‘death benefit dependant,’ then they will not pay tax. A death benefit dependant is basically:
- Your spouse;
- Your child or children if they are aged under 18; and/or
- Any person who was financially dependent on you when you die. This might include, for example, a 21 year old child still living at home.
If the person who receives the benefits is not a death benefit dependant, then the benefits may be taxed. Once again, this will depend on the nature of the benefits within the fund.
Tax-free components of your superannuation are not subject to tax when paid out as death benefits, even if the recipient is not a death benefit dependant. Taxable components will be subject to tax of 15% plus the Medicare levy if paid out to someone who is not a death benefit dependant. So, from a tax planning perspective, if your benefits are going to be paid out to someone who is not a death benefit dependant, then it is best to aim for your benefits to be tax-free to the greatest extent possible.
Whether the benefits are taxable or tax-free depends on how they got into the fund in the first place. If a tax deduction was claimed on contributions such as from your employer making a compulsory super contribution or voluntary salary sacrifice, then the benefits will form part of the taxable component. As will investment earnings that have been generated on these benefits. If no tax deduction is claimed such as with a ‘non-concessional contribution’, these benefits will form part of the tax-free component.
You can achieve a reduction in the proportion of taxable benefits in your fund through a ‘re-contribution strategy’. This is where a fund member who is eligible withdraws benefits from the fund, and then re-contributes the benefits as a non-concessional contribution. This will reduce the amount of tax that would be paid by a non-death benefit dependant when eventually the member dies.
This is really planning for your beneficiaries to save tax on your legacy. So, if you would like to maximise how much of your super makes it to your loved ones, check that your binding death nominations are up to date. Talk to us about whether a re-contribution strategy will work in your case.
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.