Simple strategies to minimise tax on superannuation death benefits

The popularity of superannuation as a low-tax environment within which to grow wealth, coupled with longer life expectancies, will result in an increasing number of financially independent people receiving a superannuation death benefit from a parent. As the following example shows, the strategies employed by the superannuation fund member can make a big difference to the amount of tax payable when death benefits are paid to non-dependants.

A sad tale…
Triplets Alan, Bruce and Colin all retired from the family business at age 60. At retirement they each had a superannuation balance of $750,000, consisting entirely of the taxable (taxed) element. By their 65th birthday their superannuation balances had grown to $1 million. Tragically, on the way to their favourite fly fishing lake, their small floatplane crashed. There were no survivors. Their superannuation death benefits were paid out to their respective daughters, Anne, Belinda and Cathy, all of whom were financially independent.

Alan hadn’t drawn on any of his superannuation, and when he died it comprised only the taxable (taxed) element. As a result, the death benefit paid to Anne was taxed at 16.5%, which created a tax bill of $165,000 and left her with a net benefit of $835,000.

Bruce took a different approach and withdrew all of his superannuation just after he retired. As he was over 60 the withdrawal was tax free. Over the next five years he made non-concessional superannuation contributions of $150,000 a year, and when he died his superannuation death benefit comprised a tax-free element of $750,000, plus $250,000 of the taxable (taxed) element. Only $250,000 of Bruce’s death benefit was subject to the 16.5% tax, so Belinda received $958,750.

Just before the trip, Colin was diagnosed with a terminal illness. With only six weeks to live, his adviser had recommended he withdraw all of his superannuation as a lump sum. This withdrawal was tax-free to Colin and when it passed to Cathy through his will, she received the full $1 million.

The moral of the story…
Despite apparently similar situations, the results for the three beneficiaries were quite different. As these cases show, a little bit of forethought and the use of simple strategies to alter the tax components of a superannuation benefit can make a significant difference to the net position of beneficiaries.

Death benefits paid to dependants, including spouses, are tax free, so these strategies are only relevant where the beneficiaries are not financially dependant upon the deceased member.

A brief and simplified example such as this one cannot cover all of the issues associated with implementing an effective strategy for minimising the tax on superannuation death benefits. It is, therefore, important that you obtain expert financial advice to establish a strategy that is appropriate for you.