How to Avoid Death Tax on Superannuation

Superannuation is a valuable tool for building retirement savings. However, it doesn’t always go to your loved ones tax-free when you pass away. In fact, adult children and other non-dependents can face a hefty tax bill of up to 32% on the taxable portion of your superannuation balance. With the right strategies, you can minimise these taxes. This ensures more of your hard-earned savings go to the people you care about. This article explores how superannuation death taxes work, who they affect, and how to avoid death tax on superannuation. Let's walk through the steps you can take to safeguard your family's financial future.

How Is Superannuation Taxed?

Superannuation (super) is subject to a specific tax regime in Australia. This includes both contributions and the funds accumulated within your super fund. 

1. Contributions Tax

When money is deposited into your super fund, it may be subject to contributions tax. This includes:

  • Concessional contributions (before-tax contributions), such as employer contributions and salary sacrifice. Concessional contributions are taxed at 15% within the super fund. This is typically lower than the marginal tax rate for most individuals. There are limits on concessional contributions, and if you exceed the cap, additional tax may apply. However, the concessional cap can be increased by using a three-year "carry-forward" rule if you haven’t fully used the concessional contributions cap in the previous years.
  • Non-concessional contributions (after-tax contributions) made from your income. These contributions are not taxed when deposited into your super fund. However, there are annual limits on how much you can contribute. Exceeding these limits may result in tax being levied on the contributions in excess of the annual limits.

2. Investment Earnings Tax

The tax rate on investment earnings within your super fund depends on which phase your superannuation account is in, rather than on the individual themselves.

  • While you are in the accumulation phase (saving for retirement), the tax rate on investment earnings is generally 15%.
  • Once you start drawing an income from your superannuation (pension phase), the tax rate on earnings on the part of the fund that is supporting the pension drops to 0%. This provides a significant tax advantage, allowing your super to grow more quickly during retirement.
  • Transition to Retirement (TTR) phase was previously taxed at 0%. However, now, earnings within a TTR pension fund are taxed at the normal super fund rate (15%). 

3. Tax on Withdrawals

The tax you pay on superannuation withdrawals depends on the type of fund you belong to, your age and whether your super is in the accumulation or pension phase.

  • Over 60: Withdrawals, whether from the accumulation or pension phase, are generally tax-free.
  • Under 60: Withdrawals will generally incur tax on the taxable portion of your super balance. This will depend on whether you are in the accumulation or pension phase. The tax rate on these withdrawals will generally be the lower of 15% or your marginal tax rate, less a 15% rebate (reflecting the tax already paid within the fund). However, if you haven’t met a condition of release, you will not be able to withdraw funds. 

Superannuation Death Tax Percentages

If you pass away, your beneficiaries, such as a spouse, child, or other relatives, typically receive death benefits. The tax rates applied to the death benefit depend on whether the recipient is a tax-dependent or non-dependent as defined in tax law.

If the beneficiary is considered a tax-dependent (such as a spouse or minor child), the superannuation death benefit is usually tax-free. However, if they are adult children or non-dependents, the death benefit will be taxed.

If you are a non-dependent (such as an adult child or friend) inheriting super, and the super consists of employer contributions or salary-sacrificed amounts, you will pay tax on the taxable portion. The tax rate is 17% in these circumstances. This includes a 15% superannuation tax and a 2% Medicare levy.

If the superannuation includes after-tax contributions (i.e., money the deceased person put in after they had already paid tax on it), the tax on those contributions could be 32%. 

Example:

When an adult child inherits superannuation from their parent:

  • If the super includes pre-tax contributions (like employer contributions), the recipient will pay 17% tax on that part of the super.
  • If the super includes after-tax contributions, the recipient will pay a 32% tax on that part.

If you want personalised support with your tax affairs, our experienced and certified tax accountants can help. To kick things off, give us a call at 1300 728 875 or fill out a contact form

Exemptions on Superannuation Death Taxes

  • If you inherit super from a deceased police officer or soldier, you will always be treated as a tax-dependent. This means the death benefit is tax-free.
  • You can omit superannuation death tax for a financial dependent or someone in an interdependent relationship. This is a snapshot test, meaning the relationship is assessed at the time of death. For a spouse, former spouse, or minor child, the superannuation is automatically tax-free. Adult children who do not meet these conditions must prove their financial dependency.
  • Interdependency is a close personal relationship where both parties live together and provide financial and domestic support. Even if you’re not related, you can be interdependent. An adult child caring for a sick parent, or parents caring for a disabled child, for example, may qualify. 
  • Disabilities don’t disqualify interdependency, but you must meet certain requirements unless the disability prevents them from being satisfied.

How to Minimise Taxes After Death

  • Setting up a testamentary trust, which takes effect upon your death, allows you to manage the distribution of your assets (including how and when). This can reduce taxes, especially for minor children or those unable to manage the inheritance. Testamentary trusts also benefit from tax concessions, offering an effective way to minimise the tax burden on your estate.
  • Ensure your will reflects your current financial situation, asset values, and any changes in tax laws. 
  • Withdrawing superannuation or gifting assets can reduce the taxable size of your estate. Be sure to consult a financial advisor to understand the full tax implications.
  • One of the most effective ways to minimise death taxes on superannuation is by rolling your superannuation balance into a tax-free pension fund before death. Pension funds are generally tax-free for eligible beneficiaries. 
  • Withdrawing funds from superannuation pension accounts before death can help avoid taxes on inheritance. 

Please note that this is general advice only. If you need specific advice on your own situation, it’s always best to speak to a tax professional or accountant. Get in touch at 1300 728 875 or fill out a contact form and we can start you off.

Death and Taxes in Australia

When Was Death Tax Abolished in Australia?

Death taxes were abolished in Australia in 1979. However, taxes on superannuation death benefits still apply in specific cases. This is different from the old death tax in Australia, which applied broadly to estates. 

Are There Other Death Taxes in Australia?

  • While there is no "inheritance tax" in Australia, capital gains tax (CGT) can apply when beneficiaries sell inherited assets such as property, shares, or other investments.
  • If the deceased’s home was their primary residence and is sold within two years of their passing, CGT is generally exempt. Learn more in our blog on CGT on inherited property.
  • If the asset has appreciated in value since the death of the deceased, beneficiaries may face CGT when selling.
  • The deceased’s estate may generate income during the administration process, such as rent from properties or interest from bank accounts. A final income tax return needs to be lodged for income earned before death. 
  • While beneficiaries inheriting property typically don’t pay stamp duty when it is transferred into their name, they may need to pay stamp duty if the property is later sold or gifted.
  • If the deceased was running a business, the estate may need to manage GST obligations. This is especially true if the business is sold as part of the estate.
  • If the deceased had unpaid taxes, the executor of the estate is responsible for ensuring these debts are paid out of the estate before distributing assets to beneficiaries.

Proposed Death Tax in Australia

In November 2024, the Victorian Government implemented significant increases to probate filing fees, effective from November 18. The proposal gained attention after the Australia Institute, a progressive think tank, suggested reforms to the country’s inheritance system to address wealth inequality. They argued that introducing taxes on large inheritances could help fund public services and reduce economic disparity.

The idea, however, sparked a strong backlash, with critics voicing concerns about fairness and potential impacts on families and small businesses. Many politicians and public figures quickly distanced themselves from the suggestion. Prime Minister Anthony Albanese explicitly stated that the Labor government would not support a death tax under any circumstances. Similarly, opposition parties have strongly opposed such measures, emphasising their commitment to protecting Australians from additional financial burdens.

As of 2024, no official plans for a death tax have been introduced into Parliament or put forward for a vote. Public sentiment, combined with clear opposition from major political parties, makes it unlikely that such a tax will come about in the foreseeable future. However, debates around wealth distribution and tax reform continue to surface from time to time.

How to Avoid Death Tax on Superannuation: Expert Tax Advice on Superannuation

Estate planning, including minimising taxes on superannuation and other assets, is complex. Although taxes are part of life (and death), strategic estate planning can significantly lower the tax liabilities your heirs may face. Working with a financial advisor or accountant will help you create a personalised estate plan that meets current laws, reduces tax liabilities, and ensures your beneficiaries receive their inheritance with minimal tax burdens.

If you need help planning your estate and minimising your superannuation death taxes, don’t hesitate to reach out to our team at Darcy Accounting and Taxation. You can also fill out a contact form or call us on 1300 728 875. 

Read More: Maximise Your Salary

Make sure that every dollar from your pay check goes as far as you can make it with these tips from our expert bookkeepers. 

Contact us