Strategies to Reduce Tax for Superannuation Beneficiaries

In our last article, we discussed who you can nominate as a beneficiary on your superannuation account and the tax treatment of your superannuation beneficiary nomination. If you missed that article, you can access it HERE.

Scenario 1: Superannuation Passed from One Spouse to Another

• A spouse (married or de facto) is an eligible beneficiary and considered a SIS Dependant.

• A spouse is also a Tax Dependant.

• All benefits paid to a spouse are tax-free, regardless of the superannuation components.

Scenario 2: Superannuation Paid from a Parent to a Child

• A child (including biological, adopted, stepchildren, and children of a spouse or de facto partner) is an eligible beneficiary and a SIS Dependant.

• A child under age 18 is a Tax Dependant.

• A child over age 18 is only a Tax Dependant if they are financially dependent or disabled. There are strict qualification requirements around financial dependency and disability.

• If a child is not determined to be a Tax Dependant, tax will be payable on some or all of the superannuation benefit received.

Scenario 3: Superannuation Paid to Your Legal Personal Representative or Estate

• Your Legal Personal Representative is an eligible beneficiary and a SIS Dependant.

• However, they are likely not a Tax Dependant, meaning tax may be payable on some or all of the superannuation benefit received.

Strategies to Reduce Tax Payable

1. Withdraw Superannuation Prior to Death

This strategy may be considered by individuals with a terminal illness. However, several factors should be taken into account:

• Funds withdrawn from superannuation can be invested elsewhere, but the concessional tax rates available within super may not apply outside it. This could result in income tax and capital gains tax implications.

• Timing may be affected by incapacity or sudden death, leaving insufficient time to complete a withdrawal.

• If the superannuation fund holds illiquid assets, selling them may be delayed, impacting the ability to withdraw.

2. Implement a Withdrawal and Re-Contribution Strategy

 This strategy involves:

• Withdrawing money from your superannuation account and re-contributing it.

• It is typically used to reduce the taxable component of a superannuation balance and increase the tax-free component.

• Often implemented by retirees or those nearing retirement to improve estate planning outcomes and reduce tax for beneficiaries.

Keep an eye out for our upcoming article on the withdrawal and re-contribution strategy, including who may benefit from it and the associated risks.

If you have any questions about how these strategies may impact you and your family, feel free to reach out for a discussion.