Tax-free components critical for optimising death benefits

Ms Westover said that while this may not seem important while they are receiving an income stream as any amounts will be tax-free, it will matter when it comes to paying death benefits. 

“It’s really important to keep track of those taxable and tax-free components. Know what they are and how they’re actually calculated because there will be tax paid on superannuation benefits on the taxable components when death benefits are paid to adult children,” she reminded SMSF professionals.

“Within the taxable component, you can have a taxed element and an untaxed element. An untaxed element is rare, but where those benefits are paid ultimately, you’re going to have a 30 per cent rate plus Medicare on the untaxed element and a 15 per cent plus Medicare on the taxable component.”

If the tax-free component cannot be distinguished, then the whole amount will be treated as a taxable component. 

“So, in other words, when those death benefits are paid, you’re going to have a taxable component. So please track it to know what those tax components are,” she said. 

“The way you work that out is your taxable component is your total benefit less your tax-free component. Your tax-free component is basically made up of your non-concessional contributions, so your non-concessional contributions segment plus a crystallised segment. Those that have been in the industry for a while will appreciate that the crystallised segment was made up of a whole heap of other components that we used to have in superannuation, so there was concessional component, the post-June 1994 invalidity component, the CGT exempt component, a pre-July1983 component and an undeducted contribution.”

“All of those make up the crystallised amount for tax-free and any of your non-concessional going forward, that is your tax-free component, and then your taxable component is your total benefit less your tax-free component. Very important to keep track of, or you are potentially going to leave a death tax to your adult beneficiaries.”

Ms Westover noted that clients would often point out that their benefit will go to their spouse and that it’s going to be tax-free.

“Well, that works for one spouse, but it doesn’t work for both of them. So even with couples, it is highly likely there is going to be a death benefit to an adult child at some point. So this emphasis on taxable and tax-free components is critical,” she explained.