One of the items listed as to what we can control when it comes to money, is our focus on how we can consider lowering taxes. As we know there are two sure things in life… Death and Taxes.
Did you know that when your superannuation/pension monies are passed down to your adult children upon death, that the estate can pay up to 17% in taxes on these monies?
How does this work? Let’s consider this case:-
Jim has a superannuation portfolio of $1.5Million and retired on the 1st of June 2019 at the age of 60. The superannuation fund is made up of two components as follows:-
- Taxable component – Balance $1Million – this component is made up of any past employer contributions (SGC) and pre-tax contributions that Jim has made
- Tax free component – Balance $500,000 – this component is made up of any personal contributions (post tax contributions) that Jim has contributed in the past.
Jim is married to Jackie and when Jim passes he would like his superannuation to go to Jackie, and if both himself and Jackie pass, these monies will be passed down to their two children, Jack and Jill.
In the case that Jim passes first and Jackie receives the superannuation monies, Jackie is seen as a dependant under the SIS act and will receive the monies tax free as a spouse.
In the event that the superannuation monies are passed onto the two adult children in the future, upon Jackie’s death, under the SIS Act the children are seen an independent and will be taxed at 17% on the taxable component of the superannuation fund. Based on Jim’s taxable component of $1M in the superannuation fund, this would be tax payable of $170,000 in total. (based on current figures as we know them)
In this case, we were able to consider reducing Jim’s taxable component of his superannuation fund to reduce estate taxes to the next generation by implementing a strategy generally known in the financial planning industry as “re-contributing” the monies to superannuation.
In this case, we actioned the following:-
- Jim rolled over his superannuation monies of $1.5M to an account-based pension to begin an income stream to draw $80,000 for their desired lifestyle.
- Jim made a withdrawal of $200,000 prior to the end of the financial year – June 2019 (withdrawal tax-free due to being over 60 years old) and re-contributed the monies to new superannuation funds of $100,000 each (Jim and Jackie)
- Then in July 2019 (new financial year), withdraw $600,000 from Jim’s pension account and contributed to superannuation, $300,000 each
- In the 4th year, we actioned the withdrawal of $200,000 from Jim’s pension account and contributed to superannuation, $200,000 each
- And the 5th year prior to Jim’s 65th birthday we withdraw another $500,000 from Jim’s pension account and contributed to superannuation of $250,000 each.
The outcome of this was that Jim and Jackie ended up with account-based pensions with similar balances with the majority of the balance in the tax-free component, as the monies they contributed back to superannuation were designated as personal contributions (post-tax). All tax-free components then being tax-free to non-dependants – adult children and hence the tax payable of $170,000 for the estate has become negligible by proactively considering some planning around the superannuation.
This tax seems to be a tax that many people are unaware of and with the control of good financial advice in a timely manner, your hard-earned money can be passed down tax effectively to the next generation unless you wish to spend it beforehand!
Frances Easton | CFP®️ Professional, MFinP, BBus-Acc, SMSF Specialist Advisor is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.