Avoiding Tax on Inherited Super - Key Strategies

Australians are facing a growing 17% tax bill on inherited super and many are turning to timing-based strategies to reduce the financial impact. Missing the right window, however, can lead to unexpected costs for families. With more than $3.5 trillion expected to be transferred between generations, financial advisers are helping clients minimise unintended tax obligations by either withdrawing super funds early or restructuring accounts.

This tax issue is becoming more urgent as more Australians near retirement. Super accounts grow through compulsory employer contributions, known as the superannuation guarantee, and benefit from initial tax concessions. When these funds are passed to non-dependent inheritors such as adult children, the government recovers part of the tax concession by applying a 17% tax. What was intended to be a secure retirement savings pool is now becoming an unexpected tax burden for many families.

To reduce this impact, advisers often recommend two key strategies. The first is a recontribution plan where retirees withdraw the taxable portion of their super and then contribute it back as a non-taxable component. This keeps the funds within the super system and eliminates the inheritance tax on the recontributed amount. The second strategy involves withdrawing all super funds before death and distributing them personally. This avoids the tax completely but money held outside the super environment may be subject to other taxes such as income tax or capital gains tax. It also misses out on the concessional tax treatment given to super balances up to $2 million.

Timing plays a crucial role in both strategies. Advisers note that these moves are most effective for investors over 60 when super access rules become more flexible. While clients with self-managed super funds often use these strategies, many large industry super funds also support them. These institutional funds may experience slower turnaround times due to administration requirements. Poor timing may also force families to sell assets while settling the estate, which can reduce the overall value inherited.

With 700,000 Australians expected to retire by 2029, more households will be affected by this issue. Meanwhile, upcoming government discussions may reshape the broader tax landscape. Potential changes include reduced capital gains tax discounts and increased scrutiny on family trusts. These adjustments could significantly affect investment and estate planning strategies in the future.

Source: The Australian, The Gild Group, MoneySmart

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