Understanding Superannuation Death Benefits and How to Avoid Common Pitfalls
Superannuation plays a critical role in estate planning, especially for those who wish to maximise tax efficiency and optimise outcomes for beneficiaries who are not tax dependants. Navigating the complexities of super withdrawals before death requires careful planning and a clear understanding of the rules. Here's a closer look at some key considerations:
Death Benefit vs Member Benefit
Understanding the difference between death benefits and member benefits is crucial:
Member Benefits:
Paid tax-free when:
Due to terminal illness, or
To individuals over 60 from a taxed fund.
Death Benefits:
Paid to non-tax dependants are taxed at up to:
17% from the taxable component.
32% from any untaxed component (e.g., insurance proceeds).
Key Consideration: A withdrawal classified as a member benefit before death can be distributed tax-free, whereas death benefits are subject to these tax rates.
ATO Guidance and Practical Applications
The Australian Taxation Office (ATO) clarified its position in February 2023:
If a trustee is aware of a member’s death before making a payment, the payment must be classified as a death benefit.
If the trustee is unaware of the death, the payment remains a member benefit.
For SMSFs:
Trustees are presumed to have immediate knowledge of a member’s death, given the close relationship with the deceased.
For APRA Funds:
Trustees may not be aware of death until formally notified. Payments completed before notification are typically treated as member benefits.
Strategy Considerations
Planning in Advance:
Proactive estate planning can reduce reliance on last-minute death bed withdrawals. Key strategies include:
Non-Concessional Contributions:
Leverage the bring-forward rule to increase tax-free components.
Clients over 67 can make contributions if they meet the work test.
Recontribution Strategies:
Withdraw and recontribute funds to increase the tax-free component of super balances.
Downsizer Contributions:
No upper age limit, allowing clients to contribute proceeds from property sales to their super.
Isolating Tax-Free Components:
Maintaining separate pension interests for tax-free amounts can direct benefits to non-tax dependants more efficiently.
Consideration of Estate Planning Arrangements:
Ensure Wills and binding death benefit nominations align with anticipated super withdrawals.
Avoid complications where withdrawals change the estate’s asset distribution.
Example: Billie plans to distribute her estate equally among her three children, with specific assets already allocated through her Will. Making a member benefit withdrawal before her death ensures tax efficiency and preserves the intended distribution.
Use of In-Specie Transfers:
In-specie transfers of investment assets to an Investor Directed Portfolio Service (IDPS) account can preserve investments while avoiding immediate cash withdrawals. These transfers are considered member benefits if processed before death.
Avoiding the Need for Last-Minute Withdrawals
While death bed withdrawals can reduce tax liabilities, proactive planning offers greater certainty:
Regularly review super balances and associated tax components.
Implement contribution strategies early to maximize tax efficiency.
Consider financial products or strategies that minimize taxable super components over time.
