Cash your super before you die unless you have a spouse or dependant children. If you don’t, make sure your super is gone when you go.

Cash Your Super Before You Die

You probably wonder why. Having super is good. Leaving super for your children sounds like a nice thing to do. And it is… but you can leave them a lot more if you cash out in time.  

If you wait too long, your super might leave a massive tax-bill in its trail. And what will your children remember more – your super or the tax bill they got hit with? 

But now you probably shake your head and remember the terrible time when your spouse died. You had both just turned 65. And back then you received his or her entire super without any tax to pay. So why can’t you do the same for your children? 

Death Benefit Dependant

The answer is just one phrase – death benefit dependant – also referred to as a tax dependant.

Death benefit dependant is the term the ITAA97 uses. Tax dependant is the term the ATO uses on their website. Two different words. Same thing.

As a spouse you qualified as a death benefit dependant. A spouse, a child under 18 as well as anybody in an interdependency relationship with or financially dependent on the deceased is considered a death benefit dependant. And death benefit dependants receive the entire death benefit tax-free. 

But your children are neither under 18 nor live in an interdepencey relationship with or are financially dependant on you. So they don’t qualify as death benefit dependants. 

Sole Purpose

This concept of a death benefit dependant links back to the sole purpose of superannuation. Its sole purpose is to provide for your retirement and/or your death benefit dependants when you no longer can. For that purpose your super received massive tax concessions over the years.

But anything that is left over when you die clearly wasn’t needed for your retirement or any death benefit dependants. So the legislator wants those concessions back.

Those concessions were never intended for your financially independent children. And so they charge your adult children a so-called ‘super death tax’ unless you cash your super in time.

Cashing Super

Cashing your super just means moving it out of the super environment. You do this by paying a member benefit to yourself – be it as a pension or a lump sum. 

A lump sum payment can be in cash. But a lump sum can also be in specie. So you don’t sell the asset, but transfer the title from the corporate trustee to yourself.

Factors to Consider

But picking the right time to cash your super is not easy. There are 7 factors to consider, some impossible to predict with certainty.

# 1   Family Situation

While your children are little and your spouse alive, you don’t need to worry about super death tax. You need to worry about life insurance.

But when your spouse has passed away and all your children are financially independent, then this is an issue you should think about.

# 2   Tax-free and Taxable Components

Your super consists of a tax-free and taxable component but either might be nil. Your taxable component consists of a taxed and untaxed element but either might be nil as well.

If your entire super is in the tax-free component, you don’t need to worry about super death tax. None of your beneficiaries will pay any tax on your super.

But if all of your super in the taxable component – untaxed element, then a 30% tax rate looms large over your non-dependants.

Have a look at your super statement or your SMSF’s last annual return. It will tell you how much of your super is in the tax-free component and how much is in the taxed and / or untaxed element of your taxable component. 

# 3    Marginal Tax Rate

The higher your marginal tax rate, the more you save by leaving your super in your fund. If your marginal tax rate is 45% tax + 2% Medicare, then leave your super where it is as long as you can.

If you have no other income and your super earnings are under the tax-exempt threshold, then you pay no tax anyway – be it within super or outside of super. So then you might as well take it out.

# 4   Timing

If you take your super out too early, you might pay more tax outside of super than your beneficiaries pay in death tax.

But if you don’t cash your super before you die, you might waste part of your family’s legacy on super death tax.

# 5   Capital Gains Tax

Unrealised capital gains appear in your SMSF’s Statement of Iincome, but they are not included in your SMSF’s tax calculation. So you don’t pay tax on unrealised capital gains. And that is good right now. But can really come back to bite your beneficiaries if you don’t cash out before you die.

When you die, your non-dependant children can only receive a lump sum, not a pension. And a lump sum is tough on any cash flow. To pay this lump sum your SMSF must either sell the assets to pay cash or transfer the title to pay in specie. Either way – sale or transfer – you are looking at a CGT event and hence a potential realised capital gain.

And while you are alive and in pension phase, a realised capital gain isn’t an issue since your super is exempt from tax anyway. But once you have died, you are no longer in pension phase. Your pension has stopped. There is no exempt current pension income – ECPI – anymore. And so now this realised capital gain is no longer exempt from tax.

# 6   Franking Credits

If Labor wins in May, your SMSF might lose the ability to claim franking credit refunds.  If you have other income outside of super – for example from a family trust distribution – you might not incur any additional tax from moving your shares out of the super environment. 

# 7    Fate

Call it fate, destiny, divine intervention or something else.  Accidents happen. People get sick. Nobody knows how much time they have left. But you might have an inkling.

So these are seven factors to consider to work out whether and when you should cash your super.

Example

To finish off, let’s do a quick numbers game around timing.  Let’s assume you are over 65 and widowed with financially independent children. You have no income outside of super but a healthy $3m in super. This $3m consists of $1m in the tax-free component, $1m in the taxed element and $1m in the untaxed element.

Scenario # 1 – You Die Straight Away

A)  You cash your super, invest it outside of super and die. Your children receive the entire $3m and pay no tax.

B) You don’t cash your super and die. Now your children only receive $2.55m. Because here is the tax they have to pay on each of the components:

$1m in tax-free component = no tax
$1m in taxable component – taxed element = 15% tax = $150,000
$1m in taxable component – untaxed element = 30% tax = $300,000.
Total tax liability = $450,000.  

Scenario # 2 – You Live Another 4 Years

A) You cash your super and get a $100,000 return each year, taxed at $25,oo0. So when you die four years later, your children receive $3.3m. Ignoring compounding interest.

B)  You don’t cash your super and four years later your children receive $2.95m after tax since your children still have to pay the super death tax of $450,000.

Scenario # 2 – You Live Another 10 Years

A) You cash your super and live another 10 years. Your children receive $3.75m . Which consists of the original $3m plus $1m investment gains less $250,000 tax on earnings outside of super.

B)  You don’t cash your super and so your children receive $3.55m after tax. 

Review

So in each of these scenarios your children are better off if you cashed your super now as opposed to later. But of course it could also have gone the other way if we had structured the example differently. It all depends on individual circumstances.

 

MORE

Minimum Pension Payments

What Happens To My Super When I Die

SMSF To Do List

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

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Last Updated on 05 September 2019