SMSF members thinking about a recontribution strategy to reduce the taxable amount of their retirement savings should consider how those funds will be treated by the ATO if passed onto their beneficiaries, a technical specialist has noted.
MLC senior technical services manager Scott Quinn said the taxable status of superannuation savings was an issue where a member died and their benefits passed to an adult child who was considered a non-tax dependant and required to pay up to 17 per cent tax on the money received.
“You have to be very careful with death benefits because when you pay it directly to an adult child, the taxable component goes into the adult child’s own assessable and taxable income,” Quinn said during a recent briefing to practitioners.
“A lot of other measures that are built on a definition of income and eligibility for those is based on a definition of income with either taxable or assessable income.
“If we have a large death benefit forming part of the taxable, assessable income of the child and pushing it up, then we have a situation where the child might have to pay back family tax benefits or make a larger Higher Education Loan Program debt repayment for that year.
“They may also be no longer eligible for a government co-contribution or if part of the planning strategy was for their spouse to make a spouse contribution and pick up that contribution tax offset, then that would be impacted as well.”
He said a recontribution strategy could avoid these post-death surprise taxes for beneficiaries by converting taxable components in superannuation to reduce or remove tax on benefit payments.
“Drawing it out of the superannuation system and then putting it back in as a non-concessional contribution means the latter will form part of the tax-free component,” he said.
“That component, when it comes out through a super death benefit to a non-tax dependant, is tax-free and it doesn’t impact those other benefits that we are talking about.”
