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Super benefits tax: death duties by another name?


Just when you thought your superannuation was yours to leave to your children, the ATO may think otherwise.

  • Finance
  • Read Time: 4 mins

By 1983, all Australian states had abolished death duty and probate duty – known as the “death taxes”. Before then, you had to pay up to 27.9% tax on a deceased estate over $1 million.

This has led many of us to believe Australia has no death tax and we can sink savings into superannuation believing it to be a tax-free inheritance vehicle.

But did you know Australia does have a form of a death tax? It’s the tax on superannuation death benefits left to non-dependents, and it can potentially hit the super assets you leave your children.

As we put more and more into super, the potential tax hit can be significant. There is on-going debate about introducing a raft of inheritance taxes, including taxing the family home and increasing the super benefits tax.

Non-dependents


When a super fund member dies and their money goes to a non-dependant such as an adult child, there is a 15% tax. Spouses and children under 18 get it tax-free.

This surprises many retirees who think super inheritances going to their adult children will not be taxed.

However, by the time you and your spouse die, your children may well be in their 60s. At the very least, in Australia, they are likely to be over 18, which means they could be hit with a super tax of up to 32%.

The taxable component of a person’s super is affected – and you can find out more about this from your super fund statement or online balance.

More information about who is an eligible dependent is available here.

Avoidance strategies


There are strategies to avoid the inheritance tax, but it is advisable that you get sound financial advice first.

The personal finance writer at The Australian, Anthony Keane, suggests the following: 

Death timing 

Most people are allowed to withdraw their super tax-free after age 60. If you do that before you die – and timing is uncertain, of course – the money can go into bank accounts or investments and become part of your estate that’s not subject to the death benefits tax.

These investments could then attract income tax and capital gains tax, although for many seniors it may be minimal because of generous concessions such as the seniors and pensioners tax offset.

Re-contribution strategy 

This is a complex strategy that is best applied with professional help from a financial planner. It involves withdrawing money from your super then re-contributing it as a tax-free component. 

Early inheritance 

This could work for retirees who have sufficient assets to fund their lifestyle. At a certain point in retirement, the big-spending years are left behind. So, a possible strategy is to withdraw your super tax free and share it with children, friends, charities, or wherever you want. 

As Keane observes, “If you have nothing in your superannuation at the time of death, there is no super death benefits tax to pay.” 

Related reading: Legal Consolidated, ATO, The Australian

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