Scott Quinn, senior technical manager for MLC, has said in a recent webinar that a typical client usually has super guarantee contributions going into an account, maybe some salary sacrifice and personal deductible contributions, as well as contributions at some point in time.
“That then means that when it comes to retirement and benefit payments, there is usually a large taxable component sitting in the fund,” Quinn said.
“Ultimately, that taxable component, when that person dies, might go to the spouse. If there’s no spouse, or if they’re the last surviving spouse, it’ll then often go to the adult child. When that death benefit goes to the adult child it can either be taxed at, generally, 15 per cent or 17 per cent.”
Quinn said if the benefit was released through a deceased estate, it would be taxed at 15 per cent maximum, but if it went directly to the adult child, it would be taxed at 17 per cent, as the Medicare levy is added.
“The other thing you have to be very careful with for death benefits is that when you do pay a death benefit directly to an adult child, for example, that taxable component goes into the adult child’s own assessable and taxable income.”
“There are a lot of other measures that are built on a definition of income – eligibility is based on a definition of income of either taxable or assessable income. So, we have this large death benefit forming part of the taxable, assessable income of the child, pushing it up, which will create a situation where the child might end up having to pay back things like Family Tax benefits, make a larger HELP debt repayment for that year or no longer be eligible for a government co-contribution.”
Additionally, if part of the client’s planning strategy was for their spouse to make a spouse contribution, they could pick up a spouse contribution tax offset, which could also be impacted.
“Recontribution strategies are all about converting that taxable component that we typically find when someone retires and trying to draw that out of the superannuation system,” Quinn said.
“Obviously, over age 60, we’re talking about no tax on those benefit payments and drawing it out of the superannuation system and then putting it back in as a non-concessional contribution. By putting it back in as a non-concessional contribution, it forms part of the tax-free component.”
The tax-free component is exactly that – when it comes out through a super death benefit to a non-tax dependant, it’s tax-free and doesn’t impact other benefits such as FTB or HELP debt repayments.
“Recontribution strategies have been around for quite a while, and there are different ways to do it, some of them which clients believe may not apply but can,” Quinn said.
“One of those is segregating non-concessional contributions into a different superannuation account, which can be used to manage a future death benefit as well. Another reason why you might want to segregate non-concessional contributions is if you don’t, every time you make a non-concessional contribution, and then want to do another recontribution strategy in the future, you start watering down that taxable component that gets drawn out every time you do a withdrawal.”
He said this starts reducing the benefit of the recontribution strategy, depending on the client’s age and their total super balance.
“You may think about whether to separate that into a different account when you put it back in, or whether you might contribute that to the spouse’s account instead,” he said.
“When talking about the recontribution strategies, you also need to consider that there could be a cost involved in doing it – withdrawing benefits, putting it back in as a non-concessional contribution – which means you may incur buy, sell spreads. You could have time out of the market and you need to factor that in.
“If there are those costs involved for your client, you need to factor that in and let the client know there’s also the foregone returns on those costs as well.”
