Will my family pay tax on my superannuation when I pass away?

Whilst many people know superannuation benefits paid as a pension (or income stream) in retirement are tax-free, one question we regularly get asked is 'Will my family pay tax on superannuation I leave them?'. This is often quickly followed by 'Can I reduce the tax?'.

Our article explores the detail of different superannuation components, how tax may be levied on beneficiaries, and strategies that can be used to reduce tax payable by beneficiaries.

Taxable and Non-Taxable Superannuation Components

Superannuation typically consists of two components - a taxable and a tax-free component.

Taxable Component

The taxable component of superannuation refers to the portion of your superannuation benefit that may be taxable. This component often includes amounts contributed as employer (or Superannuation Guarantee) contributions, salary sacrifice contributions and investment earnings.

Tax-Free Component

The tax-free component of superannuation refers to the portion of your superannuation benefit that is not subject to tax. This component typically includes contributions that are made after-tax (or non-concessionally) and may include contributions made as standard non-concessional contributions, as part of the small business exemption or downsizer concession.

How does the taxable and tax-free components impact me?

Typically, funds withdrawn from superannuation (either as a lump-sum or pension) after 60 and in retirement are received tax-free; irrespective of whether they come from the taxable or tax-free components of superannuation.

Taxable Component

Tax may be levied however, on the taxable component of your superannuation benefit paid to a beneficiary after your death. The relationship between you and your beneficiary is important in determining whether there is any tax payable:

• Benefits paid to a 'Tax Dependent' including your spouse, former spouse, dependent child (aged under 18) or financial dependent may be paid tax-free.

• Benefits paid to a child aged 18 and over, and not dependent are typically taxed at 15% + Medicare Levy.

Tax-Free Component

The tax-free component of your superannuation is typically paid tax-free to beneficiaries, irrespective of your relationship, assuming other superannuation conditions are met.

Is there a way to reduce the tax payable when leaving my superannuation to non-dependents ie. Adult Children?

Recent changes in superannuation legislation have made it easier for retirees up to age 75 to implement strategies to reduce the taxable component of superannuation, to reduce the impact of taxation on leaving a superannuation benefit to adult children.

To do this, a 'Re-Contribution' Strategy may be used to personally withdraw funds from superannuation in retirement and re-contribute these funds as a 'non-concessional' contribution - increasing your tax-free component and reducing your taxable component. There are complex rules to consider when withdrawing and re-contributing including:

• Meeting withdrawal eligibility requirements.

• Meeting contribution eligibility requirements.

• Managing the impact of market risk whilst undertaking such a strategy.

• Managing Transfer Balance Cap requirements (as applicable).

Additionally, it is important to consider whether your current superannuation balance will likely have a taxable component to be left to your estate. If you plan to spend your last superannuation dollar on your last day - keep enjoying your retirement!

For these reasons, it's imperative you seek professional advice to determine if this strategy may be applicable for you.

If this is something you are interested in exploring further, please don't hesitate to contact our office on 07 3185 3414 or Luke directly on 0488 022 676.