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Don’t get hit with Super death taxes

What happens after you go is often one of those things left for someone else to worry about.  But your adult kids won’t thank you for an unnecessary tax bill, so what can you do about it?

A large portion of most people’s Super is considered “taxable” due to the fact that they or their employer have received a tax deduction when it was contributed.  By the time a pension is drawn from the fund post retirement or after age 60, it is generally tax free anyway, so largely ignored.

BUT, if the Super finds itself in the hands of adult children (over 25 or over 18 and not studying full-time), they will pay 17% tax on a portion of the proceeds.  The portion is determined by the percentage of the fund that was considered “taxable” at the point when a pension was first commenced.

For example, let’s assume Jack has $1m in his super fund today, of which 80% had been created through contributions that have received a deduction, along with the associated earnings.  If he were to pass away today, his children could be up for $136,000 in tax.

The solution is to put in place a proactive “Withdrawal and Re-contribution” strategy that increases the percentage of the fund that is considered “tax-free”.

To do this, Jack needs to:

  • Be retired, or over age 65 and therefore able to withdraw lump sums from his super fund without paying tax.  If he’s retired he can withdraw up to $180,000 as a one-off tax free payment between the ages of 55 -59, or at 60 he can withdraw any amount tax free.
  • Be able to contribute to super (if retired be under age 65, or if over 65 be able to meet a 40 hours in 30 days “work test”)
  • Be able to re-contribute the amount to super without breaching any Contribution Caps (which are typically $180,000 per year or $540,000 using the 3 year bring forward rule under age 64).  See our Post Budget Ready Reckoner for further details.

Assuming we start this strategy early enough, Jack may be able to eradicate the taxable portion of his fund completely and save his children the $136,000 in tax.

There’s a range of complexities and opportunities that make advice critical for the over 55’s when it comes to Super.  Ensure you, or your family members, don’t make costly mistakes during this important self-funded retirement period.

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