Article by Craig Lane
as featured in the Farm Weekly issue 19 May 2022
A common issue facing the older generation is what to do with superannuation when it comes to estate planning. As has been indicated in recent articles in this publication, the best practice is to use a binding death benefit nomination, as this ensures the trustee of your superannuation fund acts as you wish.
But the next question is just as important. Who does it get nominated to, and what are the tax impacts of this? The choices are to nominate either:
- directly to an individual/individual, or
- to the estate, such that the super is distributed per your will.
A quick recap on the basics – if superannuation on death is ultimately transferred to a spouse, child under 18, or somebody deemed by the SIS Act to be a financial dependent, it will be tax-free.
The significant tax implications arise when a person dies not having any of the above people to leave superannuation to i.e. no surviving spouse and all children are over 18.
Generally, the tax rate on superannuation nominated to an estate is 15% versus 17% if it is willed to individuals. So, there is an immediate 2% saving by nominating to an estate, meaning a $10,000 saving on a $500,000 superannuation balance.
There are also 2 hidden tax costs of nominating directly to individuals versus the estate.
The first applies if the recipient is running a farming business, and therefore in the primary production averaging system. The super benefit received will remain in that person’s average history for the following 4 years, almost certainly increasing the tax payable during that time. It is hard to put a dollar amount on this cost, but for a profitable farming business and a $500,000 superannuation balance, it is likely to run into the tens of thousands.
The second significant “tax” cost applies if the beneficiary has their own family and is claiming Family Tax Benefit. Again, if it is a significant super balance, the cost could run into tens of thousands of dollars.
The above might suggest that nominating superannuation to your estate is always the best way to go. But separate from the tax issues, an estate can generally be challenged, while a nomination direct to an individual cannot. The key takeaway is to ensure that you are using a specialist estate planning lawyer to complete your wills, with input from your accountant.
Finally, it should be noted that only the taxable portion of your superannuation is taxed on exit. There are strategies to convert more of your superannuation to non-taxable status, but that is a topic in itself.
To discuss this article further, we encourage you to contact Craig Lane on (08) 9674 6400, or your Byfields accountant.
Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice.