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Smart Investing
Taxation of super savings upon death
 January 16, 2008
Robin Bowerman
One of the most controversial issues arising from the new super system that keeps arising is the taxation of super savings upon a fund member’s death.
In its pre-budget submission for 2008-09, the accountancy professional group CPA Australia calls on the Government to make the tax treatment of super death benefits identical, whether received by a dependant or non-dependant of the deceased.
Under the law, the taxation of super death benefits can vary significantly, depending upon who receives the payouts.
Without doubt, this is one of the most complex and possibly misunderstood measures in the new super regime.
The taxation of super death benefits is much more of a crucial issue than in the past because the overall attractions of the new super system have drawn much more money into super.
Under the new super system, in force from July 2007, lump-sum super death benefits are tax-free if paid to the deceased’s spouse, children under 18 and other dependants who are defined in the legislation.
But components of lump-sum death benefits are generally taxable at up to 16.5% if paid to non-dependants of deceased members. These taxable components include "concessional" pre-tax contributions (mainly salary-sacrificed contributions), fund earnings, and what is known as the post-1983 part of the deceased’s super savings.
And the tax-free components of lump-sum death benefits paid to non-dependants are pre-July 83 benefits and non-concessional contributions (previously known as undeducted contributions).
Financial planners commonly suggest strategies, mainly the withdrawal and recontribution of super savings, for fund members to minimise tax on super death benefits that will eventually be paid to their non-dependent beneficiaries who include their financially independent adult children.
Keep a close watch on the issue of super death benefits: you will be hearing much more about it in the coming months.
More articles from this edition of CompareShares:
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Resident Trader: Making typos when inputting trades can cost you big time
CFDs: How do margin calls work on CFD trading?
Analysis: The Recession we don't have to have
Smart Investing: Taxation of super savings upon death
US: Citigroup has $10b loss, US markets dive
Commodities: China coal shortage to continue
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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