During your working career you would have been contributing to a superannuation fund in preparation for your retirement.
These contributions are usually made in one of two ways. One where there has been a direct tax benefit from the contribution and one where there has not been a benefit.
This issue is important because it will help determine the level of any Death Benefits Tax that will be payable in your Estate.
Employer Contributions and Salary Sacrifice – Taxed Taxable
Any contributions that have received a Tax Benefit going into your super will be classified by your fund, and the ATO as Taxed Taxable money. This includes any employer contributions, known as Superannuation Guarantee (SG) and any employee Salary Sacrifice Contributions throughout your working life.
For most Australians this makes up between 90-100% of their super balance. These contributions are known as Concessional Contributions and have their own annual cap. This classification is because the funds where taxed at 15% in your super fund as opposed to being taxed at your Marginal Tax Rate (MTR)
Personal Contributions – Tax Free
Personal Contributions are those made by the member directly where there has been no tax benefit obtained from the funds being put into super. This often happens later in a person working life through such things as inheritances and property sales. These contributions will be classified by your fund, and the ATO as Tax Free money. These contributions are known as Non-Concessional Contributions and have their own annual cap.
Treatment on Death and Death Benefits Tax
When people pass away it is common for their superannuation to go to their surviving spouse in the first instance but in most cases, there will be residual superannuation that will either make its way to the Estate and the beneficiaries noted in the Will or be dealt with by the fund where there is a valid Death Benefit Nomination. This is where the Tax Treatment classification is important.
Generally beneficiaries in either the will, or via a superannuation nomination, at this stage will be non-dependant adult children. When this is the case any funds that are distributed directly to the kids from the super fund and are classified as Taxed Taxable will be taxed at 17%, which is 15% plus Medicare of 2%.
Any funds that are classified as tax free will be distributed to the same recipients with no tax due.
Planning opportunities
At CTWealth we ensure this issue is identified and discussed at our initial engagement so together we can set about managing it as effectively as possible. This is normally achieved through multiple strategies including keeping the Taxed Taxable and Tax-Free monies separate from each other to allow for a more targeted distribution on death, and also re classifying the status from Taxed Taxable to Tax Free.
These strategies are complex and must be managed appropriately however they can have very large Estate Planning Benefits.
Case Study
Shirley has worked in the QLD Government for the majority of her career. She has built up a QSuper Balance for retirement of $759,000 and is now ready to retire at 62. She intends to leave any super on death evenly to her two adult children aged 36 and 39. To manage this, Shirley has signed QSuper Binding Death Benefit Nominations.
Her contributions to super throughout her life have been funded via a combination of her employer and her compulsory personal contributions, which Shirley elected to do before tax.
This has resulted in Shirley’s super having the following tax components:
Total | $759,000 | 100% |
|---|---|---|
Taxed Taxable | $736,000 | 96.9% |
Tax Free | $23,000 | 3.1% |
If we were to set up Shirley into retirement and not address this, we would have 96.9% of any residual super left on Shirley’s death being taxed at 17% before going to the kids.
If we assume that Shirley still has $380,000 of her super left on death, then the fund would pay the residual to the kids in accordance with the Binding Death Benefit Nominations and they would withhold tax as follows:
Death benefit Paid to the ATO | $ 62,598 |
|---|---|
Total Super Death Benefit | $380,000 |
Taxed Taxable Classified | $368,220 |
Taxed Taxable Classified | $368,220 |
Tax withheld @ 17% | -$62,598 |
Tax Free Classified | $ 11,780 |
Tax withheld @ 0% | -$0 |
Death benefit paid to adult children | $317,402 |
In this situation by not dealing with the Death Benefits Tax while we had the chance Shirley’s children have effectively paid $62,598 to the ATO from their inheritance. At CTWealth we identify and set about removing this issue, where possible, with all of our clients.
