Media Release - "Death duty" is present in many SMSF's

Mr Michael Hutton, head of wealth management at accountants and financial advisers HLB Mann Judd Sydney, warns that it is not widely recognised that there is a virtual “death duty” on payouts from superannuation to non-financial dependants on the death of a fund member, and SMSF trustees may not be keeping adequate records to minimise its impact.

Mr Hutton said that, while the tax payable depends on the category of contributions made to superannuation, the tax affects all funds although it is more likely to be significant in SMSFs because of the extra contributions above the contribution guarantee that members have made over the years.

“It is therefore important for members, and their advisers, to keep track of the type of contributions made to superannuation – this includes categories such as how much is after-tax contributions (that is, member non-concessional contributions); how much represents taxable employer, or taxable personal, contributions; and the like. 

“These amounts should be summarised by category in the Member Information Statement provided by superannuation funds, but with SMSFs this record-keeping might not be as disciplined as it should be – and these are the very funds that are most likely to have after-tax contributions made by members.”

Mr Hutton explained that the “death duty” tax applies on the death of anyone who still has assets in a superannuation fund. 

“If these are paid to a financial dependant, such as a spouse or child under age 18, they are tax-free,” he said. 

“However, if they are paid to non-financial dependants, the proportion of any payout that is deemed to be from the taxable component will be taxed at 16.5%.

“If, for example, 40% of the member’s account is categorised as tax-free as a result of after-tax contributions and other factors (including any pre-1983 service period), then the remaining 60% is deemed taxable.  It is this 60% component that will be taxable at 16.5% on payout to any non-financial dependents.

 “This is, in effect, a very significant death duty,” he said.

Mr Hutton said that fund members should check their balances and the component percentages of contributions, and be aware of these ramifications, particularly those with grown up children.

“There are steps that could be taken to reduce the tax payable by beneficiaries.  For example, there is no tax liability if the member is over age 60 and withdraws all superannuation balances shortly before death,” he said.