Superannuation Death Benefit Tax
When you die and your super balance is passed onto your beneficiaries, your superfund will need to pay tax on any realised gains at 15% (or 10% Discounted CGT); and then your beneficiaries may need to pay an additional 17% on the taxable component.
Understanding how to mitigate this risk can save your beneficiaries hundreds of thousands of dollars for very little effort.
Example: $600k Super Balance
| Component | Amount | Tax Rate | Tax Payable |
|---|---|---|---|
| Tax-free | $200,000 | 0% | $0 |
| Taxable - Cost Base | $300,000 | 17% | $51,000 |
| Taxable - Capital Gains | $100,000 | 27% | $27,000 |
| Total | $600,000 | - | $78,000 |
How Death Benefit Tax Works
Superannuation balances have two components: tax-free and taxable. The tax-free component is always tax-free when paid as a death benefit, regardless of who receives it.
The taxable component is further divided into "taxed" and "untaxed" elements. Most people have only taxed elements, which are taxed at 15% plus Medicare levy (2%) = 17% when paid to non-dependants.
Untaxed elements (from certain government funds or untaxed employer contributions) can be taxed at up to 30% plus Medicare levy (2%) = 32%.
Death Benefit Tax Rates
| Component | Tax Rate (Non-Dependant) | Tax Rate (Dependant) |
|---|---|---|
| Tax-free component | 0% | 0% |
| Taxable - Taxed element | 17% | 0% |
| Taxable - Untaxed element | 32% | 0% |
Death Benefit tax only occurs if all three conditions are met:
- The Beneficiary is not exempt
- There is super balance remaining
- The super balance is not tax-free
Which means any of the three solutions is possible:
- Define the benefit to your spouse or other dependant
- Withdraw it all, only possible if older than preservation age 60
- Non-Concessional contributions are tax-free, so you can put it into super
One other important consideration is that while in pension mode your super pays no tax.
Beneficiary Tax Treatment
| Exempt Beneficiaries | Taxed Beneficiaries |
|---|---|
|
|
Other Super Rules of Consequence
- While in pension mode your super pays no income or capital gains tax
- Gains are always considered taxable amounts
- You can only contribute $120k non-concessionally into super each year if you have less than $1.9M in super
- You can only move $2.0M into pension from your accumulation account in your lifetime
- When withdrawing funds from your pension you withdraw tax-free and taxable amounts proportionally
How this impacts what you can do:
- If you have a large super balance you can't just withdraw it all, then put it back in
- You can use the bring forward rule to do three years of $120k; but that only works if you have less than $360k
- If you use the recontribution strategy early in your retirement you will end up with taxable amounts from all the gains that you will need to sort out still
- You don't want to withdraw it too early as you will then have to pay income tax on any future gains when it's in your own name
Strategies
- Recontribute by taking larger lump sums and putting it back into your super. It only works for low balances and you can be faced with some tax avoidance rules.
- Make your spouse or dependent children the beneficiary; and hope you die first or before they turn 18.
- Withdraw your pension as a lump sum before you die. Still has benefit if done years before you die. Note that this will make it part of your general assets for distribution by your will.
Super Death Benefit — Full Withdrawal vs Do Nothing
Calculate the death benefit tax you can save by withdrawing everything at a chosen year before death and investing outside super (taxed at your marginal rate). Death is assumed at 10 years + 1 day.
| Withdraw at year… | Personal Tax | Super Tax | Death Tax | Beneficiary Receives | Benefit |
|---|
How to Track This with Self Managed
Self Managed tracks your superannuation balance and tax components. When you make withdrawals and contributions, the system updates the component breakdown automatically.
Monitor your contribution caps and total super balance to ensure you can continue making non-concessional contributions for the re-contribution strategy.
FAQ
This is ideal! If you're in pension phase, earnings in the fund are generally tax-free.
You can use the bring-forward rule to contribute up to 3 years' worth of non-concessional contributions ($330,000) in one year, but this locks you out of further contributions for 2-3 years.
Untaxed elements are taxed at 32% (30% + 2% Medicare levy) when paid to non-dependants. You can't convert untaxed elements to tax-free through re-contribution, but you can still reduce the overall taxable component.
Your super fund statement shows the breakdown of tax-free and taxable components. The taxable component is further split into taxed and untaxed elements. Check your most recent statement or contact your fund.