The official death tax was abolished over 30 years ago, but estates are still subject to other death-related taxes – and they’ll hit the ones you love the hardest.
Here’s what you can do now to minimise the taxes – and frustrations – of super payout to your beneficiaries.
What’s the death tax in Australia?
‘Death tax’, also called death duty, was a tax payable on any money inherited from a deceased person. It was introduced in 1914, but abolished by the Fraser government in 1979.
Even though we no longer pay tax on inheritance, there are still other forms of tax payable for beneficiaries of a deceased’s estate, assets or money.
The death tax might still make a comeback, and it’s understandable
The discussion about reintroducing the death tax keeps cropping up because of the predictable changes in our population. By 2055, it’s expected almost 23% of Australia’s population (8.9 million) will be over 65 years old. 25 years ago, the number was 15%, or 1 million people.
The dramatic change we’re about to see in our demographics makes it an excellent time to double-check your own retirement portfolio. The right structure and plan can make all the difference when it comes to transferring your assets and money to your beneficiaries painlessly.
The hidden corners of death tax
There are a few types of taxes that apply when you pass away. It’s a complex topic, and I’d go as far as to say it’s a conversation you must have with a retirement planner or financial expert, so you can receive tailored advice. But for now, let’s have a look at the overview of death taxes in Australia.
How much tax will your beneficiaries pay?
When you pass away, it’s not a ‘done and dusted’ transfer of your superannuation and assets to your beneficiaries. Your beneficiary may need to pay tax on the superannuation payout, called a super death benefit, of around 15%.
Working out how much your beneficiaries will pay is complex. It’s not just defining the taxable and tax-free components of your super. The Australian Taxation Office (ATO) says it’s actually the ‘who’ receiving your inheritance that determines tax owed on certain components.
It depends on:
- The age of the beneficiary (and your age, too)
- Whether the beneficiary is a dependent or not
- If the benefit is paid as a lump sum or income stream
Lump sum: if your beneficiary receives the payment as a lump sum, no tax is due for the taxable component.
Income stream: if the money is portioned out as income, various rates of tax will be due on the taxable components, depending on the variables listed earlier.
For example, if your benefit is paid out as an income stream to a dependent who’s more than 60, the tax rate is your marginal rate less 10% tax offset.
If your dependent is younger than 60, the tax offset increases to 15%. But, having said that, there are plenty of other variables to consider, and by no means is it that simple to determine tax payable on the taxable portion of your superannuation benefit.
What you can do to prepare for the future
If you’re in retirement planning stages, there are a few ducks you can get in a row to make the super death benefit easier on your beneficiaries, and minimise tax payable.
- Make a binding nomination
You can make a binding nomination directly with your superfund. It ensures your super goes to the beneficiaries you nominate, which is important because the superfund’s governing rules can override the requests of your will. Who receives your super balance is the most critical factor in tax payable.
- Keep your will up to date
When you pass away, your dependents will have to request a new Tax File Number for the trust that your money and assets are moved to, and then distributed as per your nominations. However, failing to name a person responsible for this role can set up a lot of roadblocks for your beneficiaries.
- File all your tax returns
Before any transfer of superannuation or assets can take place, all your tax returns must be squared off with the ATO. That means if you’re behind in your tax, your dependents will have to go through your finances and submit them on your behalf. There are horror stories of business owners not submitting tax returns for over thirty years, and you don’t want to leave that as your legacy.
- Use a financial planner or tax expert
Using the services of an expert is one of the best ways to minimise the taxable portion of your superannuation, because they can advise the best way to set up and contribute to your super with the best tax outcomes. Have a financial planner or retirement specialist review your superannuation portfolio, and use a tax accountant to do your tax refunds each year.
As we said earlier, setting up your retirement structure isn’t straightforward. That’s why we recommend getting professional advice, especially when it’s something that will affect your family after you’ve gone.