Implications of death less than certain
Many Australians have the mistaken belief that when they die, the remaining balance of their superannuation can be transferred to an adult child tax free, Cavendish Superannuation technical services manager Tim Miller said.
“While any remaining superannuation is transferred tax free to a surviving spouse or child under 18 years of age, any money going to adult children will be taxed at 15 per cent unless they are financially dependent on the deceased member,” he said.
“It’s essentially a death tax and one that many people enjoying their retirement with a superannuation funded income stream don’t realise is applicable to their situation.”
Miller said the law says superannuation funds paid to a person who isn’t considered a tax dependant, such as adult children or same sex partners, have to pay the 15 per cent tax.
However, there are strategies available to superannuation fund members to minimise the prospect of paying the tax, but they require pre-planning.
“If the client has retired and they are currently receiving an account-based pension, and know that they are dying, there is no limitation on the maximum income that can be drawn,” he said.
“Potentially the client can withdraw their remaining benefits tax-free and distribute this to their adult children.”
Miller said the strategy will only work if the client is over 60 and the superannuation is in a taxed fund.
The second strategy involves making large voluntary contributions prior to turning 65 and potentially beyond if the client can meet the work requirements after that age.
“The benefit of making large voluntary contributions to superannuation is that this money is exempt from tax,” he said.
“So if the client dies, it can be distributed tax free to whoever they have nominated as a beneficiary, even adult children.”
Miller said the only qualification with this strategy was that the client needs to keep to the capped limits for voluntary contributions — currently $150,000 a year or $450,000 in any three-year period for individuals under age 65 — to avoid any tax penalty.
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