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Inheriting superannuation can be a complicated affair in Australia, particularly when navigating the associated taxes that can significantly reduce the amount passed down to loved ones. Finance expert Ben Nash highlights the importance of understanding these nuances to avoid hefty tax liabilities that can reach up to 30% for significant sums.
Understanding Superannuation Inheritance
When you inherit a parent’s super fund, you might not receive it tax-free, especially if you are classified as a ‘non-dependent’, such as an adult child. The Australian Taxation Office (ATO) does not exempt superannuation benefits from tax automatically; understanding who qualifies as a ‘dependent’ is crucial in this context. Dependents include:
- Spouses or partners
- Children under 18
- Individuals who are financially reliant on the deceased
In such cases, benefits can be inherited tax-free. On the other hand, ‘non-dependents’, which encompass most adult children and other family members, will face the superannuation death benefits tax when receiving inheritances.
Tax Components of Superannuation
Superannuation funds are comprised of different components, which dictate the tax implications on inheritance:
- Taxable (Untaxed): Subject to a flat tax rate of 30% when received by a non-dependent.
- Taxable (Taxed): Attracts a tax rate of 15% for non-dependents.
- Tax-Free: This component is exempt from tax, even when received by non-dependents.
Typically, the ‘taxable (taxed)’ portion is the largest part of most people’s super funds, derived from compulsory employer contributions, salary sacrifice, and any growth on these funds.
The Impact of Inheritance Taxes
To illustrate, should you inherit a superannuation benefit of $1 million that consists primarily of the ‘taxable (taxed)’ element, you could incur a tax bill of roughly $150,000. This is a significant amount that could otherwise remain within the family.
A Strategy to Mitigate Taxes
Fortunately, there is a viable strategy—the ‘withdrawal and recontribution’ approach. This method can minimise or potentially eliminate the superannuation death benefits tax when implemented appropriately.
How It Works:
- Upon reaching the age of 60 and meeting a condition of release (like retirement), individuals can withdraw portions of their super tax-free.
- The withdrawn amount is then re-contributed as a non-concessional contribution, which is made from after-tax income.
This strategy allows the funds to shift from the ‘taxable’ component into the ‘tax-free’ section of superannuation, thereby rendering them tax-exempt upon inheritance.
Timing and Conditions
Timing is essential. This process needs to occur while both parents are able to contribute to their super fund. The regulations surrounding the withdrawal and reinvestment of super funds can be intricate, and acquiring professional advice is advisable to navigate these complexities effectively.
The Bigger Picture
Australia stands on the brink of an unprecedented intergenerational wealth transfer, estimated to be in the billions, predominantly through superannuation and property assets. Understanding superannuation inheritance taxes and how to manage them is vital to maximising wealth retention within families.
Failure to address these matters could lead to significant, potentially avoidable losses. Engaging in proactive discussions about financial planning and inheritance strategies is crucial, especially when dealing with the impending transfer of wealth.
Conclusion
For parents with superannuation intending to pass it to adult children or non-dependents, beginning these conversations early can prevent unforeseen financial losses. Without an informed strategy, you risk incurring a substantial tax burden on inheritance, detracting from the wealth intended for future generations.
Ben Nash, renowned finance expert and founder of Pivot Wealth, emphasises the necessity of being aware of and proactively managing these tax implications to ensure that as much wealth as possible is retained within the family.
For families looking to understand their financial future better and navigate the intricate landscape of superannuation tax, consulting with a qualified financial advisor can provide clarity and actionable strategies to safeguard your legacy.
