Did you know that your superannuation funds can have a hidden tax payable on death? A good tax advisor or SMSF Specialist, either in Perth or elsewhere, can help you maximise the tax liabilities in your superannuation fund – for both you and your extended family.
So how does the death tax work for a SMSF (or any superannuation fund)?
The tax benefits of a superannuation fund
Let’s start at the beginning. If you salary sacrifice money into your superannuation fund you will enjoy a lower tax rate on the money contributed.
Mary earns $10,000 of income.
If Mary salary sacrifices the $10,000 into her super fund she will have $8,500 to invest after tax.
If Mary invested the same $10,000 at a personal level she would have had $5,300 to invest after tax.
The decision to invest your money is a separate decision to enjoying the tax concessions. If the investments chosen are the same – Mary is 60% better off by investing in a superannuation fund.
How superannuation works for superannuation investment income
The income from the investments in a superannuation fund environment are taxed at a lower tax rate.
Marys investments earn $2,000.
The after tax earnings in a super fund are $1,700.
The after tax earnings in Mary’s name are $1,060.
So, in addition to the immediate tax benefit for Mary, the ongoing earnings in a superannuation fund are higher due to the tax concessions.
The compounding nature of these investment returns can be significant.
The death of a member – salary sacrificed and investment income
Government policy is for superannuation funds to only support the retirement of the individual and their spouse.
The concept of only is important here. The purpose is not to carry the wealth forward for future generations.
So the government requires that some of the tax concessions paid to persons, on death, other than the spouse and children, are wound back. This is the tax we actively plan to manage and reduce.
A superannuation bequest to a minor or spouse is tax free
If superannuation fund monies are bequeathed to a spouse then there is no extra tax.
If superannuation fund monies are bequeathed to a dependent under 18 then that payment is also tax free.
Bequest to an adult child incurs tax
If superannuation monies (all concessionally taxed) are bequeathed to an adult child the fund will incur a tax impost of 17%. This tax is payable before the money leaves the superannuation fund.
Mary dies with $1,000,000 in her superannuation fund. All of the superannuation monies was from salary sacrificed contributions and investment earnings.
The full $1,000,000 is bequeathed to Mary’s wife Sally. The bequest to Sally is tax free.
The full $1,000,000 is bequeathed to Mary’s 5 year old son (William). The bequest to William is tax free.
The full $1,000,000 is bequeathed to Mary’s 32 year old son (Harry). The bequest to Harry creates a tax liability of $170,000.
In this instance we can see that the tax is only created when it goes to people who do not “need” it. A child, or spouse are protected from the death tax.
An exception for after-tax contributions
If a person contributes money to super, that is already taxed, then there is no tax when the money when it leaves the super fund. This is to avoid double taxation.
Mary contributes $117,000 to her superannuation fund from her own money. She has paid tax on this money. She does not claim a tax deduction for putting it into super.
Mary dies and her estate withdraws $117,000 from her super fund. This withdrawal is tax free regardless of who receives it.
An after tax contribution is also called a “non-concessional” contribution.
An exception for monies taken while still alive
If a person is over 60 the monies taken from the super fund are tax free.
Mary has $1,000,000 in his superannuation fund. All of it is from concessional contributions.
Mary is retired and over 60..
Mary withdraws $200k from his superannuation fund.
The $200k to Mary is tax free.
These monies in Bob’s hands are now considered to be “after tax” money.
1. So a person can withdraw monies from a super fund, while alive tax free: and
2. The money out of a super fund is now “after tax” money; and
3. A person can contribute after tax monies to their superannuation fund; and
4. After tax monies paid from the super fund will, on death, avoid the death tax.
So a combination of all elements together will allow a fund to “wash” their concessional taxed monies in their superannuation fund to non-concessional monies.
The “washing” practice really only requires money to come in and out of the fund. The additional paperwork is done by a strategic Perth tax advisor.
This strategy has a few key limitations – in particular the government will impose additional tax burdens on families who contribute too much to a superannuation fund. Further, if your superannuation fund has a certain type of pension you will lose tax concessions if you take too much out. We are simply trying to show you the opportunity without the boring detail (leave that to the accountants!). You also need to work your superannuation fund plan in conjunction with your family charter so the distribution of monies on death is fair to your family.
Of course the advice on how to invest the monies in your superannuation fund is at the discretion of the superannuation fund trustee (together with the recommendations by a financial product advisor). We recommend using a collaborative network of Perth based SMSF advisors including your tax professional, a family business advisor, a life insurance broker, a superannuation auditor, a finance broker (or good bank manager) an actuary and a licensed investment advisor. The combination of these independent professional people is critical to getting all of this working.
At Westcourt Family Business Accountants we stress independence of advisors who are focussed on their niche. This allows the best of both worlds – people who are focussed on great advice and people who are focussed on great investments that are tailored for you.