Many Australians assume their super will pass to their children tax-free. However, adult children can face an unexpected tax bill. Our recent CommonCents Financial Planning webinar explored how super death tax works and the planning options that may help protect your family’s inheritance.
What Is the Super Death Tax?
Australia does not have a general inheritance tax. However, tax may apply when a superannuation death benefit passes to someone who is not a tax dependant.
This commonly affects financially independent adult children. A spouse is generally treated as a tax dependant, but an adult child with their own career and finances usually is not.
The important question is not simply how much super you have. It is who will receive it and how your balance is divided between taxable and tax-free components.
Why Your Super Components Matter
Your super is broadly divided into taxable and tax-free components.
The taxable component generally includes employer contributions, salary sacrifice contributions, deductible personal contributions and investment earnings.
The tax-free component usually comes from personal contributions for which you did not claim a tax deduction.
The tax-free component remains tax-free when paid to a beneficiary. The taxable component can attract tax when paid to a financially independent adult child.
For example, a $100,000 taxable component paid directly to an adult child could attract $17,000 in tax. This includes the Medicare levy. Different treatment may apply when money passes through an estate.
An untaxed element may face a higher rate. This can sometimes arise with insurance held inside super or certain public sector arrangements.
Who Is Most Likely to Be Affected?
The main risk arises when super will eventually pass to adult children who support themselves financially.
The key questions are:
- Who is likely to receive your super?
- Are they a tax dependant?
- How much of your balance is taxable?
- Does your account contain an untaxed element?
- Is life insurance held inside your super?
This issue may not feel urgent while your spouse remains your intended beneficiary. However, your position can change after the first partner dies.
Four Ways to Reduce the Super Death Tax
1. Consider a Withdrawal and Recontribution Strategy
This involves withdrawing money from super and contributing it back as a non-concessional contribution. Non-concessional means no tax deduction is claimed.
The recontributed amount usually forms part of the tax-free component. This can improve the balance between your taxable and tax-free components.
You cannot choose to withdraw only taxable money. Withdrawals generally contain the same proportion of taxable and tax-free components as your account.
Contribution caps, age limits and total super balance rules also apply. Careful modelling is important before moving money.
2. Act While You Are Eligible
A recontribution strategy requires access to your super and eligibility to contribute money back. Your age, retirement status and previous contributions can all affect what is possible.
The non-concessional contribution rules may allow several years of contributions to be brought forward. However, using this option can restrict further contributions during the bring-forward period.
Eligibility can also reduce as your total super balance grows. Leaving the decision too late may close valuable planning options.
3. Plan How You Draw Down Super
Some retirees preserve every dollar inside super without considering the eventual tax position.
A planned drawdown may reduce the taxable amount remaining at death. Money withdrawn could be spent, gifted or invested elsewhere.
However, moving money outside super creates other considerations. Investment earnings may become personally taxable. The money may also affect Centrelink entitlements and form part of your estate.
The tax benefit should therefore be weighed against your income needs, estate plan and long-term security.
4. Review Your Beneficiary Nomination
Super does not automatically pass according to your will. The fund trustee usually follows the rules of the super fund and any valid beneficiary nomination.
A binding nomination can direct the trustee, provided it remains valid and meets the fund’s requirements. Some nominations expire and need regular renewal.
Check who you have nominated, whether the nomination is binding and when it expires. Life changes can leave outdated nominations pointing to a former partner or another unintended person.
Your solicitor and financial adviser should work together. Otherwise, a carefully prepared will and an outdated super nomination may produce conflicting outcomes.
Other Estate Planning Options
Super is only one part of a family’s legacy plan. Other structures may sometimes provide greater control over how money reaches loved ones.
Our article on investment bonds and long-term estate planning explains one alternative outside super.
You can also read how CommonCents approaches controlled gifting with investment bonds.
Each option has different tax, access, cost and estate consequences. No single strategy suits every family.
Practical Steps to Take Now
Arrange for your super strategy, will and enduring power of attorney to be reviewed together.
Request the taxable and tax-free breakdown of each super account.
Check whether any untaxed element applies.
Confirm who will receive your super.
Review every beneficiary nomination and expiry date.
Check where your life insurance is held.
The Bottom Line
Super death tax can create a significant and unexpected cost for adult children. Good planning may reduce this risk, but the available options depend on your age, balance, beneficiaries and personal circumstances.
The best starting point is a clear review of your super components and beneficiary arrangements. CommonCents can help model the available strategies and coordinate them with your wider estate plan.
If you would like to understand how these rules may affect your family, contact CommonCents Financial Planning for a practical conversation.
About The Author
This article was prepared with reference to a presentation by CommonCents advisers Nick Girle and James Ballin. Learn more about Nick and the team on the CommonCents About Us page.
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General advice warning: The information contained in this article is general in nature and does not take into account your personal objectives,General advice warning: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Before acting on any information, consider obtaining personal financial advice and review our Financial Services Guide.
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