Death and Taxes

|by Elsa Howarth|Taxation and Compliance

Taxes are a part of life, but the fact that it is also a part of death is not much thought about, or discussed, or planned for.

Superannuation benefits are, of course, paid tax free to one’s dependants. Actually, that’s not true. One needs to add the word “tax” to “dependants” and now it is – tax free to one’s tax dependants. Who are your tax dependants?

Well, there is your spouse, of course. Your children until they turn 18, unless they are disabled or students under the age of 25. You may also have someone who is financially dependent on you, or with whom you are in an interdependency relationship.

To illustrate, let’s look at a classic scenario. Mum and Dad, Anne and Jacob have been married for quite some time and have 4 children, Adrian, Lynn, Nina and Linda. They also have scores of grand-children, all healthy and happy and prospering.

Jacob dies suddenly and Anne inherits everything in accordance with his will. Jacob held $800,000 in super, which was paying a pension to him until his death and which reverted automatically to Anne upon his death.

So, no tax was payable.

Anne reads an article in the paper which talks about capital gains tax and tax on benefits. She is concerned and asks for help.

Her superannuation benefits total $1,000,000, with 20% of it being tax free benefits. All her children, to whom she would like to leave her benefits in equal shares, are well over 18.

So, were she to pass away today, what would happen?

As none of her children are eligible to receive a pension benefit, the super fund assets must either be transferred from the fund or sold and paid in cash.

80% of the benefit will be subject to a 17% tax. If we go back to the value of the benefits ($1,000,000), then a simple calculation will reveal a tax payable of $136,000.

What can be done to mitigate Anne’s position? Well, it is hard to say. It could involve a re-contribution strategy, a gifting strategy, the gradual sale and re-purchase of assets or even the closing of the fund at some point in time (resulting in tax free benefits to Anne).

The only way to resolve this issue would be to look at each individual’s circumstances, their dependants and their specific wishes.

To start a discussion regarding your super and how it will be passed upon your death, contact our office.

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