If you inherit your mum or dad’s super fund, you can pay tax of up to 32 per cent. (Source: Getty)
Australians risk losing a huge amount in superannuation inheritance due to little-known tax rules. Older generations will transfer trillions of dollars in wealth to younger generations in the coming decades, with much of this money to come via superannuation and property assets.
Most families don’t realise that their kids could lose a third of their inheritance to superannuation tax. But Pivot Wealth financial adviser and Yahoo Finance contributor Ben Nash said this tax could be “completely avoidable” with a bit of strategy.
When someone passes away, their superannuation is split into two main parts: the tax-free component and the taxable component.
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If the money goes to adult kids or anyone who is not financially dependent on the person passing down the super, the taxable portion gets hit with a “death tax” of up to 32 per cent.
“On a $1 million balance, that means $320,000 that can be completely gone,” Nash explained.
The biggest component of most people’s super funds is the taxable component because it’s made up of any compulsory employment super contributions, salary sacrifice or tax-deductible contributions, and the growth and earnings on these funds.
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The good news is it is possible to reduce or avoid the tax altogether.
“The fix here is what’s called a withdrawal and recontribution strategy. It’s a pretty simple concept, although the rules are a little bit complicated,” Nash explained.
“Basically, while your parents are still alive and eligible, they can withdraw some or all of their super, pay no tax on the withdrawal, and then put it back into their super as a non-concessional or after-tax contribution.
“That shifts their super balance from taxable to completely tax-free. When you do that gradually over time, you can save literally hundreds of thousands of dollars in future tax.”
Your parents would need to be over the age of 60 and meet a condition of release (like retirement) so they can withdraw part of their super tax-free.
The rules around withdrawing and contributing to your super fund, along with how much you put in, are complicated, so it is important to get financial advice from a professional.
The Productivity Commission previously estimated that $3.5 trillion would be passed on from Aussies aged 60 and over by 2050. More recent JBWere figures put the figure at $5.4 trillion over the next 20 years.
A Finder survey of 1,017 people last year revealed 41 per cent of Aussies – equivalent to 8.8 million people – were anticipating receiving an inheritance.
One in 10 said they were depending on an inheritance to achieve major financial goals like buying a house or retiring, while nearly one in five anticipated it would significantly improve their financial situation but they weren’t depending on it.
While you are taking a closer look at your superannuation, it can also be worth making sure you have a binding death benefit nomination in place.
More than a third of people surveyed by Super Consumers Australia had no death benefit nomination with their super fund, while 25 per cent didn’t know if it was binding.
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