Super Death Tax
There is no inheritance tax in Australia. But there is super death tax.
Super Death Tax
Super death tax can be a nasty surprise for your family when they are at their most vulnerable. So best to be avoided.
Who Gets Your Super
When you die, you leave your super behind. Your left-over super goes to your SIS dependants or your estate. That’s it. SIS dependants or estate. We cover all this in Who Gets My Super.
Once this is clear, the next issue rears its head – tax.
How Much Tax
Your super might not arrive alone. It might arrive with a hefty tax bill in tow. The dreaded super death tax. To understand super death tax, you need to remember one thing. Your super had a good run. Tax deductions for contributions and a 15% or 0% tax rate. That is a pretty good deal.
The legislator did all this to help you fund your retirement. And to help those dependent on you. But now that you are no more, the legislator wants those tax concessions back for the super you left behind. Your non-tax dependants are not deemed worthy of these concessions.
The argument is that outside of super you would have paid an average 30% tax, not 0% or 15%. And so your left over taxable components going to non-tax dependants get hit with a top up. Top up back to 30% plus Medicare. This top up is the dreaded super death tax. How badly it hits depends on four factors.
1 – Tax Dependancy
When your super goes to tax dependants as a lump sum – no super death. Your tax dependants depended on you and now your super is all they got. So the legislator goes easy on them. No tax. They will get every cent of your super.
But everybody else – any non-tax dependant – pays super death tax. But who is a tax dependant and who isn’t?
Your spouse and your children under 18 are your tax dependants. Anybody financially dependant on you or living with you in an interdependency relationship qualifies as your tax dependant as well. And this can include your adult children per ATO ID 2014/22.
By the way, the official term is ‘death benefits dependant’ per s302-195 ITAA97, but that is too long and so everybody just says ‘tax dependant’.
2 – Super Components
Your super consists of a tax-free and a taxable component. We cover all this in Super Components.
Your tax-free component won’t trigger any tax – tax dependant or not – ever. You paid your non-concessional contributions out of after tax income. So there won’t be another tax charge.
But your taxable component does trigger super death tax when paid to non-tax dependants. 15% for any taxed element and 30% for any untaxed element, both plus 2% Medicare levy.
3 – Type of Payment
Your super needs to go when you go. And so it either leaves the super environment straight away as a lump sum. Or it goes into somebody else’s super account as a pension. Different rules apply to either.
The tax treatment of a lump sum depends on whether a recipient is a tax dependant or not. Tax dependants pay no death tax. Everybody else only gets the tax-free component tax-free, but pays super death tax on the taxable component – 15% for a taxed and 30% for a tax-free element.
The tax treatment of a pension on the other hand doesn’t depend on tax dependancy. Anybody receiving a pension is a tax dependant anyway since the rules overlap. It also doesn’t matter whether it is a reversionary or death benefit pension. The tax treatment is the same. For a pension it is all about age – how old is the beneficiary now? How old was the deceased at the time of death?
Both 60 or over – no tax. One of them 60 or over – no tax. Both of them under 60 – super death tax on the taxable component, but only until the beneficiary turns 60.
4 – Medicare Levy
Whether or not the 2% Medicare levy applies on top of a 15% or 30% tax rate depends on how the death benefit is paid.
If it comes directly from your super fund, the 2% Medicare levy applies. If it comes via your estate, the levy doesn’t apply. This little detail can easily cost your adult child $20,000 on a $1m lump sum death benefit.
So these are the 4 factors that determine how much super death tax your beneficiaries pay when they receive your super.
Does all this make sense? Just call me if it doesn’t. There might be a simple answer to your query.
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 02 September 2021
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We look after the tax and accounting of your business, wealth and SMSF. We are Chartered Accountants and Registered Tax Agents in Australia and IRS-registered CPAs in the US.