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Written by Michal Park – Senior Adviser
Who do you leave your superannuation benefits to when you kick the bucket? Possibly your spouse; probably your loved ones. If you leave your super balance to a dependent beneficiary, they will receive the proceeds tax free. But did you know that if you leave your superannuation to a non-tax dependant beneficiary, they will pay tax on the balance?
Based on the Superannuation Industry (Supervision) Act 1993 (SIS Act), dependants are defined as one or more of the following:
- the super fund member’s Spouse (legal or de facto)
- the super fund member’s Child (of any age),(includes an adopted child, a stepchild or an ex-nuptial child and a child born after the member’s death), and
- a person who the Trustee considers is wholly or partially financially dependent on the member at the time of death, irrespective of family relationship
- someone who the Trustee considers the member has an Interdependency Relationship with (generally someone with whom the member has a close personal relationship and lives with, and where one or each of them provides the other with domestic support and personal care)
A SIS Act Dependant also includes someone who is a dependant within the ordinary meaning of that term such as a person who may not be a spouse or child but who depends on the member financially.
Special note relating to Step Children:
In Australian Taxation Office decision (ATO) ID 2011/77 (ATO 2011), when examining the definition of a ‘stepchild’, the Tax Commissioner’s view was the relationship of stepchild to step-parent is severed when the marriage between the natural parent and the step-parent ends, ie: ‘that is, on the death of the natural parent or on the divorce of the natural parent from the step-parent’.
What are the consequences of leaving your super balance to a non-dependant?
In a nutshell, tax will apply. And it will apply at the rate of 17% (15% + medicare levy). But it will only apply to the TAXABLE component.
So if you are hell bent on leaving your super death benefit to a non-dependant, what can be done to reduce the taxable component and hence the tax?
The answer is a recontribution strategy!
Let’s look at an example:
John is over 65 years of age and has met a condition of release in order to access his superannuation balance.
He has $550,000 in superannuation; 100% taxable.
He plans on leaving his super death benefit to his non dependent adult children.
If he drops dead tomorrow, his super benefits will be taxed 17% = $93,500.
BUT, if he implements a recontribution strategy, John could reduce the tax liability dramatically.
Therefore, the tax on the new taxable component is $23,936. This represents a tax saving in excess of $69,000.
Due to pro rata-ing, the second withdrawal of $110,000 would be 80% taxable and 20% tax free, according to the new components of the super balance after the first recontribution:
Taxable $440,000 (80%)
Tax free $110,000 (20%)
So the $110,000 withdrawal must be deducted as follows:
Taxable $88,000 (80%)
Tax free $22,000 (20%) The tax free component will continue to increase as additional recontribution strategies are applied. This can be a complex topic. Whilst it may not benefit the super fund member, it will please the non-dependent beneficiaries to no end.