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Inheritance tax: Is the tax office a beneficiary of your super?

Officially, it has been 40 years since Australia abolished the formal Inheritance Tax, or death tax.  But we think that’s bunkum.  There is tax payable on super when you die and leave your money to your adult children.

Fortunately, a rule change that came into effect in July can help. But only if you engage and act.

Truth in labelling

Australia still has death taxes payable on super death benefits. When you leave your super to a child who is over 18, tax will usually be payable on the benefit they receive. And the amount can be hefty.  Tax is generally payable at the rate of 17% on the ‘taxable component’.  The taxable component is balance of your saved employer contributions, salary sacrifice contributions, and any earnings or capital gains on your investments.

Let’s look at a simplified example.  If a retiree who has never made after-tax contributions to their super dies with a $500,000 balance (taxable component), only $415,000 will wind up in the hands of adult children.  The rest, $85,000, will go straight to the tax office. 

That sounds like a death tax to us. 

The opportunity

The good news is that with careful tax planning, you can prudently reduce the super inheritance tax.

On 1 July 2022, the contribution rules changed to allow everyone under 75 years of age to contribute to super, even without working. They can even access the ‘bring forward’ provisions and contribute up to 3 years’ worth of after-tax contributions in one transaction.  That is up to $330,000.

Remember to recycle

We can manage your super death tax by ‘recycling’ or re-contributing your super.  If you’re over 60 any withdrawals from your super are tax-free, and when you re-contribute those withdrawals, they will be classified as after-tax contributions. After-tax contributions do not form part of your taxable component, so there is no tax payable on this amount when you die.

So, let’s revisit the previous simplified example. Let’s say I take advice and withdraw $330,000 from my super tax free and re-contribute it before I’m 75. If I was to die with the same balance of $500,000, my taxable component would be reduced to $170,000 and the super death tax payable would be reduced to $28,900. That’s a tax saving of over $56,000.

Benefits of active advice

At When Financial Solutions we don’t lock our clients into ongoing service arrangements. But that doesn’t mean financial planning is a set and forget exercise. Advice goes stale over time and needs to be re-visited to make the most of opportunities.

The changes to the superannuation rules on 1 July 2022 are a case in point.  

If you’d like to know more about logical ways to manage your tax, give us a call. Because when you deal regularly with us, it’s not a matter of ‘if’ you’ll make the most of your opportunities but ‘when’.


This article is general and does not consider your personal circumstances so it may not be appropriate to you.  If you would like advice specific to you, please give us a call.





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