Australians Face Double Tax Burden on Inherited Super

Australians who inherit superannuation savings may be hit with a twofold tax surprise. First is a 17% tax on the taxable portion of inherited super, followed by a possible second tax if the account has grown beyond $3 million. The intention behind encouraging retirement savings through tax benefits is now being partially reversed, as the government reclaims some of those advantages when super is passed on.

Since 1992, Australians have been required to contribute to super as part of their income, beginning at 3% and rising to 12%. While this system has helped build robust retirement savings, it has also led to an unexpected tax trap. For many people, super has become their largest financial asset. However, most are unaware that passing super on to beneficiaries can trigger significant tax liabilities.

The tax has two components. First, a 17% tax applies to the taxable part of a super balance when it is left to a non-dependent, such as an adult child. Although Australia does not have a formal inheritance tax, this tax operates in a similar way. Second, a newer tax targets unrealised gains on super balances over $3 million. This rule adds further complications, as it may apply regardless of tax offsets from earlier losses.

One way to reduce the impact of these taxes is by using a strategy known as a recontribution strategy. This is available to people aged 60 to 75. It involves withdrawing money from super, which is typically tax-free, then contributing it back into the account as a non-concessional contribution, which is also tax-free. Over time, this approach reduces the taxable portion of the balance, which means less tax is payable when the funds are inherited. However, the strategy must be carried out within the annual contribution limit of $120,000.

While the recontribution strategy can ease the tax burden, avoiding the newer tax on large super balances is more challenging. As a result, a growing number of investors are now choosing to move funds out of super as their balances approach $3 million to limit their exposure to additional taxes.

Source: The Australian, Carbon Group, AMPLIFY 11  

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