Recent superannuation proposals could impact estate planning opportunities

03 November 2016

Tony Simmons , Consultant, Private Wealth |

Proposed changes to superannuation in Australia could have a significant impact on estate planning, particularly for those who are close to retirement.

This year’s budget brought with it a range of proposed changes for the country’s superannuation scheme. These changes, among others, could have significant impacts to estate planning strategies, particularly for people now approaching retirement age. Depending on their current arrangements, they may want to consider alternate methods of wealth preservation during this time, particularly if they have high superannuation balances.

What could the proposed changes mean for estate planning?

Say you have two members in a super fund and they both have a balance of $1.2 million each. Traditionally, we’d recommend the super fund trustees prepare a two-tiered binding nomination to the effect that, if the first spouse passed away, their balance would be paid as a pension to the surviving member. Then, when the surviving member passed away, those amounts would go either to their estate or nominated beneficiaries.

The main problem this creates is that you’ve got a $1.6 million cap per member. The proposed changes the government has announced state that if you start a pension or death benefit pension for the surviving member, that remaining $1.2 million gets added to their transfer balance cap. This means their total is now $2.4 million, and they’re only allowed to pay a pension out of $1.6 million of that. There is now $800,000 dollars of excess in their cap they have to deal with in some way.

The surviving member might have to wind back that $800,000 into accumulation phase or withdraw it from the system entirely to ensure they stay within their allowed cap.

If your estate planning is relying on this strategy, it’s important to be aware of what the changes could mean. Alternatively, if you’re creating a new will or updating an existing one, it’s important to review your superannuation plans and work out how they align with the proposed changes and whether or not you can position your money in a more tax effective manner.

How to reduce tax liability on death benefit payments

There are two components to a superannuation account balance. One is the taxable component, and the other is the tax-free component. The taxable component is made up of amounts that have been contributed to the fund over a person’s working life, where a tax deduction has been claimed on them, and there are earnings on top of that amount.

If you make a contribution to super from after-tax money, that amount doesn’t get taxed by the fund, and the amount is classified as a tax-free component. A benefit paid from a taxable component can, in some circumstances, be subject to a 15% death benefits tax. This occurs when the benefit is paid to, for example, an adult child either directly or through an estate.

To avoid this, we encourage clients to take pension payments out of their fund and re-contribute them as non-concessional contributions, essentially moving some money of the taxed component into the taxfree component. This means that when a person passes, it reduces the liability to death benefits tax.

The proposed changes could impact the cash out and re-contribution strategy we encourage many of our clients to pursue. It’s still a viable strategy, however the proposed reduction of the non-concessional cap from $180,000 to just $100,000 means it would take longer to achieve the same results.

Please contact Tony Simmons for more details, [email protected] or (08) 7324 6000.

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