How to avoid the ‘death tax’ on your super fund

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Opinion

How to avoid the ‘death tax’ on your super fund

I am in my 70s, in frail health, and have been advised to close my superannuation fund – worth close to $1 million – to avoid a 17 per cent “death tax” on the taxable part of my fund balance. I don’t understand why this tax is payable, and why I have a taxable portion. I understood super in retirement was entirely tax-free.

Once a person reaches age 60, all withdrawals from their super are tax-free and, provided their entire fund is in pension mode, as yours is, there is no tax on the earnings of the fund either.

Credit:Simon Letch

The taxable component of your super comes from tax-deductible contributions, plus earnings on all contributions made before you started the pension. The non-taxable component comes from any non-concessional (post-tax) contributions made.

The rationale for the death tax is that concessional contributions are taxed at just 15 per cent when received by your fund.

The lower tax rate is an incentive to contribute to super, to reduce your reliance on the age pension. However, that money is for the benefit of the contributor or their dependents, such as a spouse, but not for other people. This is why money left to a non-dependent suffers a 17 per cent tax, made up of an effective clawback of the 15 per cent contributions tax plus 2 per cent Medicare levy.

As you say, it can be simply avoided by withdrawing the entire super balance before you die.

I hope you can solve a family question regarding a home left to four siblings. It was acquired in 1970, with our parents as joint owners. Dad died in 1994 and mum in 1995. We have recently been paid out $95,000, being one-quarter share of the property. The other three siblings still want to keep it. It has never been rented and only ever used by family members on public holidays and the odd weekend. As it has never been used to generate income, is there any capital gains tax (CGT) payable on our share?

The property was originally a pre-CGT asset, which means that your dad’s share would have passed to your mother at its valuation on the date of his death.

The property would then have passed to you and your siblings at its valuation at the date of your father’s death, plus its valuation at the date of your mother’s death.

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There will be CGT to pay but because the beneficiaries receive a 50 per cent discount – and you are paying tax on only a one-quarter share of the property – it may not be too excessive.

The good news is that because the property was acquired by you after August 1991, and has never produced income, all money spent on the property – including rates and land tax – can be added to the base cost. This means your taxable capital gain should be substantially reduced.

We are a married couple receiving a full age pension, with assets of $30,000. Interest income from savings is less than $100. I have taken a job where I earn $60 a week and supply an invoice to my employer, with no tax taken out. Do I need to file a tax return?

As you are issuing invoices and earning business income, you have to lodge a return. The amount you earn is not relevant.

I have a share portfolio worth $1.5 million which my three children will inherit in equal shares. My daughter is the executor of my will. What is the best advice for my daughter regarding the distribution of these shares? Regarding CGT, what action would be most appropriate?

Keep in mind that death does not trigger CGT. It merely transfers the liability to the beneficiaries of your will, who would pay the tax based on your original cost – if any child decides to dispose of shares.

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It may be that one or more children will sell, or otherwise choose to keep them. This is why it is important to be transparent with your family and discuss their attitude to shares, and what they might like to do with them after your demise.

It is then a matter of taking advice from your solicitor or accountant to determine the shares that should be left to certain beneficiaries, or whether any should be sold by the estate.

If your intention is to leave your children an equal share of the assets, then the CGT liability needs to be considered. For example, shares purchased before September 20, 1985 would start with a cost base of the market value at the date you died, whereas shares purchased after 1985 would have a cost base of the cost to you. This could make a considerable difference in the CGT payable – and the inheritance.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au

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