How to avoid a super death tax

SUMMARY: Protecting your family from super’s death tax can take a little planning.

Superannuation, on the surface, is about saving for your retirement. In fact, that aim is actually enshrined as the “sole purpose” of superannuation.

You save via super for decades. At some point close to retirement – before, at or some time after – you take a lump sum, an income stream, or a mixture of both.

Super pension income is, in the main, tax free.

However, superannuation has become about so much more than that. It is as much about wealth creation, estate planning and asset protection now as it is about improving your retirement.

It is about paying less tax overall in your family’s finances. And while you won’t pay any tax on the income you draw from your super fund, the same does not necessarily apply to those who receive your super in the event of your death.

It’s something that SMSF trustees tend to not put enough thought into. What happens to your super when you die?

Even though you were receiving it as a tax-free income stream, it can be taxed in the event of your death. And quite heavily (at up to 31.5%). It depends on who you are leaving the benefit to, and what the tax components of the benefit are.

For the purpose of superannuation, it is important to understand that super balances are broken down into two components, known as “tax-free component” and the “taxable component”.

And it’s equally important to understand who can get your super tax free (because not everyone can), and how to make sure as little of it as possible ends up with the ATO.

Tax-free component

The tax-free component is, nowadays, largely made up of non-concessional contributions – money that is contributed to super after tax. These are the contributions made as part of the $180,000 a year limits (as at 1 July 2014), or $540,000 under the three-year pull forward rule.

Whatever element of your super makes up your tax-free component will be received tax-free by beneficiaries.

Taxable component

It is the taxable component that causes most of the issues. And more so because this is how most people make most of their contributions.

The taxable component is made up of two styles of contributions – “taxed” and “untaxed”.

The “taxable – taxed” element is largely going to be concessional contributions, including both Superannuation Guarantee and salary sacrifice payments. This can be taxed at up to 15%, plus the Medicare Levy, when left to non-dependants.

The “taxable – untaxed” element usually only applies to government employees who received their super from untaxed government schemes and insurance sums where the super fund was claiming a tax deduction for the premiums. This is liable for tax at up to 30%, plus the Medicare Levy, again, if left to non-dependants.

Who gets it tax free?

Your spouse (including same sex partners) will always get your super balance, no matter what the tax components, without the sum being taxed.

The same applies to your children who are aged under 18. Problems start to arise when the kids turn 18. From that age, there can be requirements to prove financial dependence (beyond the scope for today).

Also, those who are financially dependent on you, or who have an interdependent relationship with you, can also receive the benefit tax free.


There are many strategies that can be used to reduce the amount of the benefit that is taxable in the event of your death. Today, I’ll mention two of the most popular ones (ignoring, of course, the straight payment of non-concessional contributions into your super).

Recontribution strategies

Recontribution strategies involve pulling money out of super in a tax-effective manner and the recontributing the money back into super. When you put it back into super, you will be making a non-concessional contribution, which will become part of the member’s tax-free component.

To do this, the member needs to both hit a condition of release in order to be able to draw on their super, plus still be able to make contributions to their super fund. Whilst I covered most of the conditions of release in this column (28/10/2013), seek specialist advice if considering this strategy.

Keeping separate pensions

If you do want to give some of your look after adult children, then one way of doing this potentially having multiple pensions, some of which are made up solely of NCCs or “tax-free components”.

If you have a pension running that is made up of largely SG and salary sacrifice contribubutions, then if you make NCCs in the future, you could set up a second (or third or fourth) pension that is made up of just the NCCs. That separate pension account could have its own beneficiary named. This would allow you to leave the “taxable” pension, for example, to a spouse (who won’t be taxed as a dependant), while the “tax-free” pension could be left to adult children (who would pay tax, but this is a tax-free pension.

Pull it out before you die

The best way of ensuring no tax will be payable by anyone at the time of your death is to make sure you don’t have any super at the time of your death.

If super has been paid out into your personal name, then it can be left via your will. And payments to beneficiaries from estates are not taxed.

If you are able to, take everything out of super as close to your dying day as you can. This can obviously be tricky – many don’t get warning of their “date of death”. But some do, as their health gradually declines. And part of that planning should be to pull money out of super, so that it forms part of your estate, where it won’t be taxed, rather than your super, which can be taxed.

The obvious downside of doing this is that it is now back in a taxable environment – any income earned on what is now in your personal name is fully taxable. So doing this closer to your likely death will reduce tax payable on income earned while you’re still alive.

Seek skilled financial advice

Today’s column is a brief peak into the sorts of things that trustees need to consider when trying to considering how to leave their super, with the minimum tax payable by your beneficiaries. There is far more to consider and I will return to further strategies in the coming months. Anyone who wants to make the most of these sorts of tax rules is advised to see a qualified financial adviser.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: