We’ve all heard the saying from US inventor, entrepreneur and politician Benjamin Franklin in 1789, “in this world nothing can be said to be certain, except death and taxes.”
Whilst there is not much that can be done to solve the whole dying problem, there are opportunities available to take the sting out of any tax bill associated with death.
When a person dies, any beneficiary recipients of their superannuation who are non-financial dependents i.e. adult children aged 18 or over, can be in for a nasty tax surprise as a result of receiving the superannuation benefit.
The tax rate applicable to some public-offer or industry funds super benefits can be as high as 31.5%. In other cases, the tax hit will be 16.5%.
Super can only be passed on tax-free when it is left to a spouse or dependent children under the age of 18. A death benefits dependent can also include a de facto spouse, former spouse, those with which you have shared an “interdependency relationship” immediately prior to death, and others who were “financially dependent” on you just before you died.
Beneficiaries outside of these parameters can be certain to face a tax liability when they receive their super benefit.
Super benefits are generally comprised of both taxable and tax-free components.
It’s the taxable component that carry’s the sting for adult children receiving a super payout. But there are ways to relieve their financial pain.
One such way is to implement what is known as a “re-contribution strategy”.
This strategy enables you to draw the taxable component of your super and re-contribute it back into the super system as an “after-tax” contribution.
Of course this can only be done whilst you are still alive.
To draw on your super you have to meet a condition of release. If you’re 65 or over, there are no restrictions on accessing your super and any funds withdrawn from super are tax-free – subject to an annual limit.
If you’re 60 or over and retired, there are also no restrictions and any funds withdrawn from super are tax-free.
So how does the re-contribution strategy work?
Mr Retired is aged 60 eligible to access their super with a balance of $500,000. The taxable component is $250,000 and the tax-free component is $250,000.
The current tax-free threshold is $185,000 so Mr Retired could withdraw enough to use up this threshold.
Any super taken must be in proportion, so Mr Retired can take a total of $370,000 – being $185,000 each from the taxable and tax-free components. This would be re-contributed back into super as a non-concessional contribution.
It should be noted that additional contributions will be limited for the next 2 years.
Prior to the re-contribution, $250,000 of Mr Retired’s super would have been taxed at 16.5% on leaving money to his adult children – that’s a $41,250 tax bill!
After the re-contribution, the taxable component reduces to $65,000 and the tax bill also reduces to $10,725.
The end result is a tax saving of over $30,000 just for moving some money around!!!!
If you would like to discuss the application of the re-contribution strategy to your personal situation, please contact Ellingsen Partners.