Saving tax on superannuation upon death

Current as of October 2014

Binding Death Benefit nominations are necessary to avoid tax on that part of your super which came from tax deductible contributions and income thereon while being accumulated.

During your lifetime, those in pension mode and 60 or over receive all their pension or lump sum payments tax free.

On death the reversionary pension or lump sum payout goes tax free to a dependent. Dependents under the SIS Act are spouses or children under 18 or dependent on you (in most cases this will mean adult children will not fall within the definition of dependent).

If Dad dies first with Mum as the nominated pension beneficiary, she continues to receive her pension tax free. While not as tax effective going forward, if she received a lump sum it would be tax free as well.

When she dies, leaving a balance of her pension account still in the super fund, if she wills the fund to her adult children they will have to pay 17.0% tax on that part of her balance which came from taxable contributions and income thereon. This taxable portion is likely to be most of the fund unless she has contributed non-deductible contributions to the fund during her lifetime.

The trick is for the person who dies last out of  Dad or Mum to have given Powers of Attorney to (probably) their children to allow some specific actions to happen in certain circumstances, to save tax.

If the surviving spouse is terminally ill or has lost their ability to make decisions, the parties holding the POA could payout the fund to her before she dies, and she gets it all free of any tax. This would save the potential 17% tax if paid out on death to an adult child.

If both Mum and Dad die in the same car crash, there would be no opportunity to withdraw all their funds out of the super tax free prior to death

If you do not have an adequate Power of Attorney, then you need to talk to us immediately. You should give a copy of this to whoever holds your POA and also your children if they do not hold your POA, so that they are aware that they need to take professional advice in the event that a surviving spouse becomes terminally ill and your fund needs to be cashed in before you die.

This is not a decision to be taken lightly as the planning revolves around paying the funds out of the superfund early to minimise tax. If, for whatever reason, the surviving spouse does not die for an extended period of time, and the fund has been paid out, then it makes the income on the investments taxable in their own hands from the time of payout to eventual death. This may end up costing you money. A big decision but one that can save you tax if proper planning is put in place.

If you would like to discuss the above feel free to contact us.

DISCLAIMER
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.