Technically, Australia does not have an inheritance tax. We used to. Death duties introduced in around 1914 were abolished in 1979. While the reintroduction of an inheritance tax is sometimes considered as part of the ongoing Federal tax system reviews, we have managed to keep it off the table for over 45 years. This contrasts to the UK and US tax systems, both of which impose taxes on deceased estates.
While the technical position is that we do not have death duties, for those who die with superannuation benefits which pass to adult children, tax is usually payable of up to 17% of the benefit value – which is not insignificant.
While the best method to eliminate this tax is to withdraw all funds from superannuation just prior to death (provided the individual is at least age 60), in most cases this strategy is not adopted – potentially because retaining funds in superannuation is generally beneficial from a tax viewpoint while an individual is alive and it is very difficult to pinpoint the preferred withdrawal date.
Since a few years ago however, it has become easier to mitigate such tax via undertaking a superannuation re-contribution strategy, because the ability to make superannuation contributions has been extended to all those under age 75 – provided your total superannuation benefits (and contribution limits) are within the required thresholds. Currently an individual (below age 75) must have less than $1.9 million in total superannuation benefits at the end of the previous financial year to make a non-concessional (after tax) contribution and any contribution must be within your annual limit (which can be impacted by prior year contributions).
How superannuation death benefits are taxed to a non-tax dependent (such as an adult child) depends on their components, which generally include taxable amounts (consisting of earnings and concessional or pre-tax superannuation contributions such as employer contributions) and tax-free amounts (such as non-concessional or after-tax contributions). While most superannuation withdrawals are tax free to individuals age 60 (plus) and when inherited as a lump sum by a tax dependent (such as a spouse), when paid as a death benefit lump sum to a non-tax dependent, the taxable component (assuming no untaxed component) is subject to tax of 15% (plus medicare if applicable). The tax-free component is, as you may anticipate, tax free.
A re-contribution strategy involves withdrawing funds from superannuation which include a taxable component and re-contributing the funds as a tax-free component, thereby potentially reducing tax applicable to future death benefit payments made to a non-tax dependent via increasing the tax-free proportion of the total benefits.
In order to make a superannuation withdrawal, preservation rules must be met, there are annual limits which apply to superannuation contributions and total superannuation benefit thresholds apply. There are also usually costs which apply to superannuation withdrawals and contributions (including tax, transaction costs and not being invested in the market for periods of time). It is important to consider such costs and considerations carefully and to obtain appropriate personal financial advice (preferably from an independent adviser) prior to undertaking a superannuation re-contribution strategy or prior to making any contributions or withdrawals.
If you are interested in discussing how a re-contribution strategy may be of benefit or are looking to optimise your financial position, please make an appointment with us to discuss your position further.
We note that nothing in this article constitutes personal financial advice. The comments are general in nature and do not take into account the reader’s objectives, financial situation or needs. You should consider your own personal circumstances and seek personal financial advice prior to making any investment decision and make sure you obtain and read any relevant product disclosure statement(s).