Will your super be subject to ‘death tax’ after 1 July?

 

Let’s get one thing clear from the start – superannuation, death, and tax are not everyone’s favourite topics… and they are fraught with complexity at the best of times.

So it wouldn’t be surprising if a change to the tax treatment of super death benefits from 1 July 2017 has slipped past your radar.

But if you plan to leave your super to your adult children when you die, it may be hit with more tax from 1 July, due to the removal of a little known gem called the anti-detriment payment.

What is an anti-detriment payment?

When a member dies, their super is paid out to their nominated beneficiary. If this is the member’s spouse1 the payment is tax free. If the beneficiary is the member’s adult child(ren), tax of up to 17% is payable.

Under current rules, many super funds also pay an anti-detriment payment2, to compensate for the tax paid by the fund during the lifetime of the member.  The amount is based on a complex formula, but can be up to 17.65%.

Case Study One

John passes away with a super fund valued at $500,000, made up entirely of a taxable component.

Date of death – before 1 July 2017

Paid to Spouse1 Paid to Adult Children
Account balance $500,000 $500,000
Tax payable Nil -$85,000 (15% + 2% Medicare)
Anti-detriment payment +$88,250 +$88,250
Net payment $588,250 $503,250

Date of death – after 1 July 2017

Paid to Spouse1 Paid to Adult Children
Account balance $500,000 $500,000
Tax payable Nil -$85,000 (15% + 2% Medicare)
Anti-detriment payment NA NA
Net payment $500,000 $415,000

Case Study Two

Revisiting John’s $500,000 super upon death.  Let’s now assume it is made up of 50% tax-free component and 50% taxable component.

Date of death – before 1 July 2017

Paid to Spouse1 Paid to Adult Children
Account balance $500,000 $500,000
Tax payable Nil -$42,500 (15% + 2% Medicare)
Anti-detriment payment +$44,125 +$44,125
Net payment $544,125 $501,625

Date of death – after 1 July 2017

Paid to Spouse1 Paid to Adult Children
Account balance $500,000 $500,000
Tax payable Nil -$42,500 (15% + 2% Medicare)
Anti-detriment payment NA NA
Net payment $500,000 $457,500

In both situations, the removal of the anti-detriment payment results in a lower amount paid to John’s beneficiaries. But the impact on John’s adult children is bigger when his super is made up of a larger taxable component.

Minimising the impact

There are number of strategies that super members can use to minimise the impact of the new ‘death tax’ from 1 July 2017:

  1. Nominate their spouse – As the spouse will pay no tax upon death of their partner.
  2. Nominate their estate rather than adult children – To avoid paying the extra 2% Medicare levy on the taxable component.
  3. Re-structure components – For some (most notably retirees under the age of 65), there is an opportunity to restructure their super to reduce the taxable component and increase the tax free component.
  4. Withdraw during their lifetime – Perhaps the greatest irony of the new ‘death tax’ on super is that it’s entirely avoidable if members simply withdraw their super during their lifetime3. We expect to see some creative estate planning

Superannuation, Taxation, and Estate planning issues are notoriously complex. You should seek personal advice before making any changes.

Important Information

  1. Includes same-sex or de-facto partners, former spouse, child <18, financial dependant or interdependent
  2. The anti-detriment amount is only payable to a spouse, former spouse, or child (of any age) of the deceased – although it may pass through the member’s estate first.
  3. To withdraw your super tax free, you must be over 60 and have an unpreserved component.

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

The information in this article reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.