This case study is for illustrative purposes only and does not constitute personal financial advice. Please speak to a licensed adviser to assess your individual circumstances.
When Olivia’s father, John, passed away at 74, she expected his superannuation to be part of his estate. What she didn’t expect was the significant tax bill that came with inheriting his superannuation, simply because she was classified as a non-dependant under Australian tax law.
John had accumulated a substantial superannuation balance over the course of his working life. He had no spouse and had nominated Olivia, his adult daughter, as the beneficiary of his superannuation fund. While this seemed straightforward, the reality was more complex.
The Tax Trap for Non-Dependants
Under superannuation law, Olivia was considered a dependant she was John’s child. However, under tax law, she was not a dependant because she was over 18 and not financially dependent on him.
This distinction meant that the entire death benefit had to be paid as a lump sum, and up to 17% in tax was applied to the taxable component of John’s superannuation. In some cases, this tax can be as high as 32%, depending on the fund’s underlying components.
What Could Have Been Done Differently?
John had a valid binding nomination, which ensured his superannuation was paid to Olivia. However, he hadn’t considered the tax implications of leaving his superannuation to a non-dependant.
With proper estate planning, John could have taken steps to reduce the taxable component of his superannuation before passing away. Below are some examples of how he could of done that:
- Withdraw and Gift: John could have withdrawn a portion of his superannuation capital tax-free (as he was over 60) and gifted it directly to Olivia during his lifetime. This would have allowed Olivia to receive the funds without triggering death benefit taxes, although gifting may have implications for Centrelink or aged care assessments. Additionally, this may not be suitable for everyone as could of impacted John’s personal cash flow if he relied on the capital to fund his living expenses.
- Recontribution Strategy: He could have withdrawn taxable components from his superannuation and recontributed them as non-concessional (after-tax) contributions. This would have increased the tax-free portion of his superannuation, reducing the tax payable when passed on to non-dependants like Olivia. However, you need to ensure that John is eligible to make contributions to superannuation as caps apply.
These strategies require careful planning and advice, but they can make a significant difference in how much of your superannuation is preserved for your loved ones.
The Lesson: Estate Planning Isn’t Just About Wills
Superannuation sits outside your will unless you direct it there. That’s why it’s crucial to plan not just who gets your superannuation, but how they receive it especially if your beneficiaries are adult children or other non-dependants.
Final Thoughts
Olivia’s story is a reminder that even well-intentioned plans can have unintended consequences. If you have a significant superannuation balance and adult children, now is the time to review your nominations and seek advice on the most tax-effective way to pass on your wealth.
Want to make sure your superannuation goes where it should, without unnecessary tax?
Let’s talk about your estate planning options today.
