As certain as death will come to everyone of us, death benefit tax can apply to your Self Managed Super Fund.
In Australia, the inheritance tax was abolished in 1979, but when it comes to superannuation, recipients of your super death benefits may still be liable to pay tax.
Depending on several factors, the death benefit tax rate can go from 0% to 17% to 32%. Tax is only applied to super benefits received by non-dependants. “Dependants” don’t have to pay tax and will receive your SMSF benefit tax-free.
So who classifies as “dependants?” According to the Australian Taxation Office (ATO), they can be:
- your spouse or former spouse
- your child below 18 years old
- any person you have an interdependency relationship with at the time of death
- any person financially dependent on you at the time of death
Except in special cases, your spouse will receive your super, whether as a lump sum or pension, all tax-free. Your children of any age can be a recipient, but only those who are under 18 are not liable to pay tax unless they are financially dependent on you or you have an interdependency relationship with them. Financial dependency, however, can be very difficult to prove.
What happens to your Self Managed Super Fund when you die?
The key is in the planning
Take note that if you are paying zero to little tax today because of franking credits or because you’re in a pension or accumulation phase, this does not mean your SMSF proceeds will have no tax.
Everyone’s situation is unique, which is why it’s important that you consult an SMSF accountant who can help you plan and legally reduce your SMSF death benefit tax.
Advance planning with a well-documented succession plan in place is still the best way to ensure your loved ones only pay for taxes you owe: no more, no less.
Grant someone you trust an enduring Power of Attorney
There are at least three things you don’t want to happen with your Self Managed Super Fund (SMSF) upon death:
- for the wrong people to receive the intended proportion of the asset
- for the wrong people left in control of the fund
- for an expensive legal battle to commence over the SMSF benefits
Thankfully, these can all be avoided by establishing a succession plan for when the time comes. The moment you start losing capacity, it’s wise to grant someone you trust an enduring power of attorney. Then he or she will become a trustee of your SMSF.
Consider a re-contribution strategy
A re-contribution strategy is a great way for your adult children to receive your Self Managed Super Fund benefit with a reduced lump-sum tax, or in some cases, zero tax.
The re-contribution strategy involves withdrawing a lump sum, paying the necessary tax on the withdrawal, and then re-contributing the funds into superannuation as a non-concessional contribution.
Implement a binding death benefit nomination
Superannuation is not an estate asset. So, it does not automatically flow to your estate when you die. Putting in place a binding death benefit nomination ensures your asset is transferred to your loved ones in the way you want.
A binding death benefit nomination allows you to advise the trustee who is going to receive your super benefit. Read more about binding death benefit nomination here.
Effective planning safeguards your wealth from unnecessary death benefit tax. It will help you pass your wealth to your loved ones without tax, drama, and trustee problems.
Get in touch with an SMSF accountant who can help you create a sound plan because when you do, you’re already halfway to a reduced death benefit tax for your Self Managed Super Fund.
Legally reduce your tax and pay only for what you owe. Contact a Chan & Naylor accounting specialist here and we’ll show you how!
Aside from tax assistance, have a look at our other accounting and advisory services designed to help you achieve greater financial success.
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