How to avoid ‘Super’ taxing your beneficiaries

When you look under the hood of your super fund, you’ll find a portion of the balance is the ‘tax free’ component while the rest is the ‘taxable’. So what’s that got to do with your estate plan?

Plenty! Without a carefully considered estate plan that considers the tax implications of your superannuation, you could unintentionally create a tax a situation for your adult children as beneficiaries when you pass away.

When it comes to superannuation, the majority of your super balance (sometimes all of it) will be considered as the taxed element. This is because your balance likely comprises:

  • Contributions made by your employer;
  • Salary sacrifice contributions to superannuation; and
  • Personal deductible contributions

These types of contributions usually pay tax as they make their way into your superannuation account.  In addition to the above, earnings within superannuation are generally allocated to the super fund’s taxed element.

The tax-free component comprises the after tax (non-deductible) contributions made to superannuation.  This is generally where a contribution is made by transferring funds from your bank account to your superannuation fund, where you don’t claim the contribution as a personal deductible contribution.

In estate planning terms, when your superannuation becomes an inheritance, adult children as beneficiaries who are not financial dependents will be required to pay tax at the 15% tax rate plus the 2% Medicare levy on the ‘taxed’ element amount.  Any amounts which are of the ‘tax free’ component will be received tax free by beneficiaries, including independent adult children.

Naturally, it is desirable for adult children to pay little or no tax when they inherit your superannuation money.

For high earning executives who typically make large after-tax contributions to superannuation, we often recommend and implement a strategy that involves establishing a separate superannuation fund.

The separate fund aims to isolate the super benefit with the high taxable component. This is because, when it comes time to enjoy your superannuation benefits, amounts (above the legislated minimum drawdowns) should be withdrawn from your super account with the higher taxable component first.  This then helps to preserve the balance of the fund with the higher tax-free component, reducing potential tax paid by adult children on your passing.

Case Study:
Bill, a high earning CEO, is finishing up work after a long and successful career.

However, Bill is mindful that in time his substantial superannuation may form part of his children’s inheritance.

With advice from his financial adviser, Bill has decided to withdraw $330,000 from his super fund to proportionally reduce the overall taxable element of his super fund, then under the bring-forward rule re-contribute the $330,000 to his existing super fund or to a separate super fund.

In doing so, Bill will reduce the tax payable by his adult beneficiaries who will in time inherit his superannuation money as part of the financial legacy he has established for them.

Next steps
I realise this is quite a complex matter and it takes a bit of getting your head around. Nevertheless, and depending on individual circumstances, it can be a tax-effective estate planning strategy that can help your beneficiaries to benefit from more of the wealth you’ve bequeathed to them.

As we’ve discussed in earlier articles, the value of an advised financial planning approach that includes collaborating with other professionals, in this case your accountant and solicitor, can achieve significantly better outcomes for you, your family or dependants.

To find out more, I invite you to contact me for a quick discussion about how I may assist you to make the most of your superannuation and overall financial circumstances, please contact James Marshall on +61 (0) 7 3007 2080 or email

To learn more about James, visit this link.

Further Reading:
You can read my earlier article about tax and financial planning here.

Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.

*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.

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