Death and Taxes - we can help you reduce one certainty!

Your member balance in your Super Fund is made up of a tax-free component and a taxable component.

The tax-free component is broadly comprised of non-concessional (i.e. after-tax) contributions that have been made to your Super Fund.

The taxable component is broadly comprised of concessional (i.e. taxable) contributions that have been made to your Super Fund, and earnings/income within your member account over time.

The calculation of the tax-free and taxable components is slightly different where your member balance is in pension phase.

What is the tax treatment of the components on death?

When your Super benefits are paid out to your beneficiaries following your death, the tax treatment depends on the components of your benefits, and whether the beneficiaries receiving your super benefits are dependants or non-dependants for tax purposes. See below table:

Component	If Paid to Tax Dependant **	If Paid to Non-Dependant
Tax-Free	Nil	Nil
Taxable	Nil	17%

** A dependant for tax purposes includes the following:

• An individual’s Spouse
• An individual’s former spouse (if any)
• An individual’s child under the age of 18, and
• Someone with whom the individual has an interdependency relationship

Therefore, if the recipient of your super death benefits is say one of your adult children (and assuming you were not in an interpendency relationship with that child when you died), that child would not be considered a tax dependant and would therefore pay 17% on the taxable component of your super benefits per the above table.

What can I do now to minimise the tax payable following my death?

Provided that you have met a condition of release (e.g. retirement, or turning 65) that allows a lump sum withdrawal of your Super benefits, you may wish to consider a re-contribution strategy.

A re-contribution strategy involves the withdrawal of all or a portion of your super benefits as a lump sum, and re-contributing those funds back to the super fund as a non-concessional contribution, subject to the relevant contribution caps.

A basic example:

Malcolm is 64 years old and has recently retired.

He has an SMSF in which he and his wife are members. Malcolm has a member balance of $500,000, which is comprised of a $100,000 tax free component and $400,000 taxable component.

Malcolm adopts a re-contribution strategy where he withdraws $300,000 from his member account and re-contributes that $300,000 as a non-concessional contribution, utilising the 3 year bring forward rule available for people aged under 65.

The $300,000 withdrawal is pro-rated between the tax-free and taxable components, i.e. $60,000 tax free and $240,000 taxable.

Let’s assume Malcolm dies at 89 years of age. His wife Lucy has predeceased him, and his super death benefit is paid entirely to their son Bill, who is not a tax dependant of Malcolm.

The tax saving for Bill as a result of the re-contribution strategy is outlined as follows:

Amount withdrawn from Taxable component	Tax Saving to Bill at 17%
$240,000	$40,800

A not so tough question – is the $40,800 better kept in the hands of Malcolm’s son Bill, perhaps being used for his children’s university fees, or is it best to have Bill give that money to the Government in tax?

We also note that if Malcolm commences a pension following the recontribution strategy, there may be further future tax savings in relation to death benefit payments as a result of future earnings/income being allocated to the tax free component of Malcolm’s benefits.

Other issues to consider:

• A re-contribution strategy can also be useful for evening up member balances between spouses (the amount can be drawn from the account of one member and re-contributed to the account of another member). The evening up of balances is even more important following the introduction of the $1.6m tax free pension cap.

• If a member withdraws their super benefits before their death, and they are over 60, there is no tax payable by them or their beneficiaries on the withdrawal (irrespective of the tax free and taxable components).

• If an individual has a total super balance over $1.6m they can no longer make non-concessional contributions to a superannuation fund.

• If an individual is over 65 they must meet a “Work Test” prior to making any non-concessional contributions to a superannuation fund (in certain circumstances contributions can be made in the first financial year that the individual has not met the work test).

• It is always recommended to seek advice to determine whether a superannuation strategy can and should be adopted by you.

What to do next?

If you would like to initiate a re-contribution strategy, or would like to discuss further, please contact our office and we would be happy to assist.