Noel Whittaker warns: Beware the ‘death tax’

It’s easy to avoid but requires planning, says Noel Whittaker.

Beware the ‘death tax’

Are you aware of the tax that can be applied to superannuation death benefits? Noel Whittaker explains how it works and how you can avoid it.

Whenever I make a speech to retirees, I talk about the death tax of 15 per cent (or 17 per cent when it includes the Medicare levy) that can apply to superannuation death benefits. Most people have never heard of it, and believe that Australia doesn’t have death duties.

Well, I guess it is not, strictly speaking, a ‘death duty’, but the effect is the same. So take the time to get your head around it – it’s an easy tax to minimise with a bit of planning.

The first thing to understand is that it applies only to any taxable portion of your superannuation fund that is given to a non-dependant; a spouse is always a dependant whether they have a separate income or not.

It does not apply to the tax-free portion of your super, so those over 60 and still eligible to contribute to super could take advice about adopting a withdrawal and re-contribution strategy. This involves taking out a chunk of your super tax-free and then contributing it back as a non-concessional contribution.

There is no cost involved, as there is no entry tax on these contributions, and it effectively converts the amount re-contributed into a tax-free component. But watch the contribution limits – there are big penalties for exceeding the caps.

The next thing to understand is that you cannot elect to withdraw just from the taxable component. If your balance is partly taxable and partly non-taxable, the components of the withdrawal will be in the same ratio as your existing balance.

Many retirees are in pension phase, which means the earnings on their funds are tax-free, as are the withdrawals if they are aged 60 or over. However, the tax-free status of the fund does not mean that all the components become tax-free as well. There will almost certainly still be taxable and non-taxable portions of the components, with the death tax applying to the taxable component when paid to a non-dependant.

One reader asked if the death tax could be avoided by leaving the money to a charity. There is no joy here, as a charity is treated in the same way as a non-dependant. A much better option for anybody who wants to leave money to charity would be to withdraw it from superannuation before they die, make an immediate donation and claim a tax deduction.

However, if you are receiving Centrelink benefits, take advice before doing this, because the gift could be regarded as a deprived asset if it is over $10,000.

So, if the tax does apply, how is it calculated? It is a maximum of 17 per cent, not a flat 17 per cent, and is deducted by your superannuation fund before paying your beneficiary the death benefit. The tax paid is recorded on a PAYG payment summary (similar to wages); when your beneficiary lodges their personal tax return, the assessable amount received and PAYG withheld must be reported. If they have a high income, or if the sum is large, the tax is rebated so that no more than 17 per cent is payable. If they have a low income, they may receive a refund of the tax paid by your super fund.

If you are considering a binding nomination, make sure you clearly understand the implications before setting it up. Once a valid binding nomination is in place, the trustee may lose the discretion to distribute the proceeds of the deceased’s superannuation fund in the most tax-effective manner.

The simplest way to avoid the death tax is to make sure you have given a trusted person an enduring power of attorney, with instructions to withdraw your superannuation in full if it appears that death is imminent. There would be no tax on the withdrawal, and the money could then be distributed in accordance with the terms of your will after your death.

This article first appeared in The Age.

Do you have a question you’d like Noel to tackle? Email us at newsletters@yourlifechoices.com.au

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature, and readers should seek their own professional advice before making any financial decisions.

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    COMMENTS

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    TREBOR
    25th Sep 2018
    12:04pm
    Robbing the Dead... and in the Last Days the dead shall rise and work among us, yea, e'en though they be silent as the grave, their functions in life via cash and assets will continue in the Spirit, governed by the Holy Writ of Elected Government..... and every Soul, sinner or Saint, will pay his dues before the Judgement Seat of the Lord, and none shall be spared but the Righteous Rich, they who have made a Covenant with Dogs and have arranged their Accounting...

    And so it shall be, ever after.... AHEM!!
    TREBOR
    25th Sep 2018
    12:41pm
    .. and he who is dead, yet shall he live for taxation...

    Invasion Of The Zombie Taxpayers .....

    Damn, Igor - we're playing to a dead house here... where is everybody? Bet Shakespeare never had to put up with this public disinterest....
    TREBOR
    25th Sep 2018
    12:51pm
    and yea, though he be crucified, dead and buried, on the third day shall an angle be found to roll aside the stone and release him to render up to Caesar as is due...
    TREBOR
    25th Sep 2018
    1:11pm
    Try Henry V then...

    If we are marked to die, let it not be to do our country loss....
    TREBOR
    25th Sep 2018
    1:20pm
    An interesting aspect of the philosophy that there is no real private ownership and that the entire worth and indeed the citizen him/herself is but a vassal of the state and that the using of every asset of the individual is the right of the state... I've told yez before about how that dovetails with the Leninist concept of The People... and how the Chinese New Mandarins and New Emperor get to utilise every aspect of their society as the means to mega self-enrichment, including the armed forces and the law as necessary - to the undying envy of our political class in their family business called politics...

    If only our lot could govern the way the Chinese do...... they could secure those billions too if it were not for those pesky demands of quasi-democracy....
    Anonymous
    25th Sep 2018
    3:39pm
    Bit of a hypocrite arent you Trebor. Ok for everyone else to pay tax, but not you
    TREBOR
    25th Sep 2018
    4:55pm
    Go - tell the Philistines that we who lie here will continue to pay our dues...

    I don't have anything to pay tax on, olbie -unlike the sneaks in business and in the business of tax avoidance..... I'm as clean as a whistle...
    TREBOR
    25th Sep 2018
    6:04pm
    I pay taxes every day... every time I spend money... just like everyone else....

    Get your mind right, Luke... at least I had the decency to pay full income tax on earnings.... unlike some.... including by your own admission - you!

    I wouldn't throw the word hypocrite around if I were you....
    PlanB
    25th Sep 2018
    12:22pm
    Yes be very aware that whoever gets into government may well bring in Death Taxes -- do not vote for death taxes -- we did have them at one stage but they were abolished in 1978-79
    floss
    25th Sep 2018
    1:38pm
    If our Federal Government had the guts to tax the overseas multi nationals they would not have to tax the guts out of working Australians.
    TREBOR
    25th Sep 2018
    3:12pm
    I've been pushing for a different version of 'imputation' - every dollar that is sent offshore has 30% withheld pending tax conclusions..... as an imputed tax it may or may not be returned in whole or in part to the taxpayer on provision of the appropriate documentation etc to justify the ta level levied........

    Some of these ideas so ferociously defended by those with no real need for them - dividend imputation used as a tax dodge - could easily be applied in other areas....

    Withhold tax @ 30% - could be applied to corporations, business people, those enjoying offshore tax havens with Australian money, and any who are under scrutiny for business problems or whatever... no more Slim Mehajers chopping off a few lazy mill to send to Lebanon for safekeeping while his business collapses...

    Sounds like the germ of a great idea to me.....
    Anonymous
    25th Sep 2018
    3:41pm
    what are you smoking. These wonderful companies are paying billions in tax .
    You should thank them every fortnight when you receive your Centerlink handout
    TREBOR
    25th Sep 2018
    4:56pm
    ... when they should be paying billions more....
    TREBOR
    25th Sep 2018
    5:08pm
    Cash in - cash out - tax in - tax out.
    Anonymous
    25th Sep 2018
    5:12pm
    As usual Trebor makes no sense or tells blatant lies

    All companies doing business in Australia are paying their fair share in tax , i.e. 30% on taxable profits

    Eg - Rio Tinto last year paid $4.5 billion in taxes which equates to 31% on their profits,

    Yet people like Trebor and Mick will swear they paid nothing
    Greg
    25th Sep 2018
    5:27pm
    olbaid - again with the BS from you, many companies DO NOT pay tax in Australia
    http://www.abc.net.au/news/2018-02-14/why-many-big-companies-dont-pay-9443840corporate-tax/
    Anonymous
    25th Sep 2018
    5:31pm
    Greg - just becasue you are unable to interpret information sensibly doesnt mean you are right.

    Companies pay tax on income tax profits , not accounting profits. Big difference, but its only a timing issue

    Please try and understand what you post especially if you're quoting from another source
    TREBOR
    25th Sep 2018
    6:28pm
    Pardonez-moi, monsieur, vous etes Inspecteur Cliche` de Bureau de Duexieme Etandardes?
    Anonymous
    25th Sep 2018
    8:28pm
    You got serious issues Trebor

    See below - 100% franked means they paid full amount of tax on those dividend they just paid out. Shame you understand nothing.

    25 September 2018

    Dear Shareholder,

    Thank you for your continued support of BHP.

    We are pleased to confirm that the final dividend for the year ended 30 June 2018 of 63 US cents (equivalent to 88.545327 Australian cents) per share, 100% franked at the corporate tax rate of 30%, will be paid to you today.

    To access your dividend advice, please click on the button below.
    TREBOR
    25th Sep 2018
    9:39pm
    You mean they lodged 30% with the ATO against your future tax? Meaning you were supposed to include the 30% withheld in your gross income for calculation - not just say 'tax paid - forget about it'.

    No wonder Shorten is chasing dividend imputation.

    Include you share payment plus the 30% in your income ... No wonder the current tax system needs a full review and overhaul... you think it's just free money when it is only tax withheld, and that somehow you don't have to include your share payments as income, plus the withheld tax as income as well.

    That's how what you said reads....
    TREBOR
    25th Sep 2018
    9:45pm
    Really got you going, hasn't it - this being called out on your tax cheating....

    Just go ahead and let the common old taxpaying worker pay your way, olbie... you pay as little as possible until the gates are slammed shut on you.

    I think cancellation of dividend imputation is a good start,and let companies pay their tax and individual pay their tax, and if the company goes bust leaving the shareholder with nothing, too bad ... pay your taxes like an honest citizen and be proud of it and what it does for this nation.

    What an absolute disgrace.
    TREBOR
    25th Sep 2018
    10:47pm
    Although the recipients are taxed on the full amount of the profit represented by the distribution and the attached franking credits, they are allowed a credit for the tax already paid by the corporate tax entity.

    ATO said that.... 'full amount of the profit represented by the distribution and the attached franking credits'.....

    So perhaps you can explain to the room how you get away with a couple of percent tax on all your incomes??
    Anonymous
    25th Sep 2018
    10:52pm
    Your constant attacks and defamatory remarks are getting pretty tiresome Trebor
    I do not owe you or anyone an explanation . I do regret providing that information now but make no apology for my substantial tax contribution in absolute terms
    Please find another person to vilify
    TREBOR
    25th Sep 2018
    11:37pm
    I get it - you're secretly a whistleblower from inside ATO who is determined to reveal that the ATO, under orders direct from the government of the day, is refunding in full the 30% without checking the tax burden on the recipient first....

    After all - it's not a free gift - it is part of gross income and assessed as such if done properly.....
    TREBOR
    26th Sep 2018
    1:33am
    My dear fellow - I did warn you not to attack ME personally... now you are getting it back... and it is clear that far too much tax revenue capture is escaping the ATO..... the trick is to find out why...

    It was YOU who struck the first blow by calling me a hypocrite - so don't be a hypocrite.

    When people can pay 1-2% of gross as tax while salting away enough to provide $200k pa tax free later... something is rotten in the state of Denmark... and business etc tax law and regulation seem to be the problem.

    It seems, at first glance, that the ATO would be better served employing more people and just ignoring a lot fewer returns and stuff... certainly the nation needs more tax revenue from income that it gets off the back of the poor old working stiff...
    Pass the Ductape
    25th Sep 2018
    1:56pm
    As always, when people begin talking about taxes and how they apply to various schemes, my eyes begin to glaze over and this article was typical. Noel - you'd lost me on the fifth paragraph. At my age I don't have the time left to wade through the gobbledegook trying to sort out if I can save a dollar or two. I consider myself very fortunate that money doesn't mean that much to me.
    TREBOR
    25th Sep 2018
    3:12pm
    Money doesn't mean much to me, either - but it does to those who expect it in payment....
    Pass the Ductape
    26th Sep 2018
    3:50pm
    Ain't that the truth Trebor - and isn't it amazing how those who worship the almighty dollar hate to miss out on the last 5c. How often have I paid an account to the tune of several hundred dollars with the last figure being 5c - and the hullabaloo you receive when you suggest they drop the 5c off!
    TREBOR
    25th Sep 2018
    3:23pm
    Way of enforcing pay for your pension - pound of flesh once you're gone...???
    Pass the Ductape
    26th Sep 2018
    3:56pm
    Oh God! Don't try to get away with a few dollars when it concerns Centrelink - not that I have mind you - but you end up owing them a couple of grand and you'll receive worse punishment than if you'd murdered someone!!

    25th Sep 2018
    3:38pm
    As soon as you are eligible, withdraw the lot and open an investment account in a tax friendly country.
    Get a second passport and spend your time between Oz and overseas so you are not caught by residency rules
    This way you get tax free income for life
    Maggie
    25th Sep 2018
    3:51pm
    You would need to spend 6 months out of this country and 6 months out of whichever other country you choose. This actually entails spending some time each year in a third country . . . .

    It's all very well if you have someone to take care of your homes/cars etc in your absence and remember you will probably be paying rates, water and telephone or internet connection fees or the equivalent thereof in both countries.

    Then take into account the airfares involved in coming and going

    Further, unless you have private medical cover, you could end up in trouble in the other countries.

    it gets pretty tedious in the end especially as you get older, and if you have lovely children and grandchildren you miss so much.
    TREBOR
    25th Sep 2018
    5:10pm
    Best you pick a Third World nation then - the once-developed world has already held conferences on how to chop down all this offshoring tax and thus bringing some economies to the verge of ruin...

    Don't be surprised if some protocols for handling tax avoidance in this way surface very soon....

    Mind you - at the Berlin time zone...
    Anonymous
    25th Sep 2018
    5:18pm
    You dont need to live in a third world country.
    That's just an ignorant comment

    If Jersey or Grenada allows you to open an investment account and only charges you 0% on on your earnings, and you dont have to live there
    TREBOR
    25th Sep 2018
    6:02pm
    Cash in- cash out.... wait for the protocols... your information is helping in their formulation.. the ICCTA is eternally grateful.
    Magic Touch
    26th Sep 2018
    8:24am
    Maggie you are 100% right, talk ìs easy when you do it you will know like Medical cover it,s a problem.
    Old Geezer
    27th Sep 2018
    10:57am
    Maggie you don't need private health insurance just travel insurance. imply come back to Australia once a year to get it. I have friends that do just that and they are world citizens and pay no tax anywhere.

    Airfares are dirt cheap these days. I recently had 8 flights to and from US and Canada and it cost me less than $1400.
    SFR
    27th Sep 2018
    9:14pm
    So OG $1400 x 8 = $11,200 + there are more expenses you would incur so not really cheap. But if you are saying 8 return flights = $1,400 then you are full of it
    Old Geezer
    28th Sep 2018
    1:15pm
    Yes the cost of all 8 flights was $1400.


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