Strategies for avoiding the super ‘death duty’

by Noel Whittaker the author of ‘Making Money Made Simple’ and numerous others

 

Whenever I make a speech to retirees, I talk about the death tax of 15% (or 17% when it includes the Medicare levy), which can apply to superannuation death benefits. Most people have never heard of it, and believe that Australia doesn’t have death duties.

Well, I guess it is not, strictly speaking, a ‘death duty’, but the effect is the same. So take the time to get your head around it, as it’s an easy tax to minimise with a bit of planning.

Value of a re-contribution strategy

The first thing to understand is that it applies only to the taxable portion of your superannuation fund that is given to a non-dependant. A spouse is always a dependant whether they have a separate income or not.

It does not apply to the tax-free portion of your super, so those over 60 and still eligible to contribute to super could take advice about adopting a withdrawal and re-contribution strategy. This involves taking out a chunk of your super tax-free, and then contributing it back as a non-concessional contribution.

There is no cost involved, as there is no entry tax on these contributions, and it effectively converts the amount re-contributed into a tax-free component. But watch the contribution limits as there are big penalties for exceeding the caps.

The next thing to understand is that you cannot elect to withdraw just from the taxable component. If your balance is partly taxable and partly non-taxable, the components of the withdrawal will be in the same ratio as your existing balance.

Taxable components of a tax-free fund

Many retirees are in pension phase, which means the earnings on their fund are tax-free, as are the withdrawals if they are aged 60 or over and eligible to withdraw. However, the tax-free status of the fund does not mean that all the components become tax-free as well. There will almost certainly still be taxable and non-taxable portions of the components, with the death tax applying to the taxable component when paid to a non-dependant.

One reader asked if the death tax could be avoided by leaving the money to a charity. There is no joy here, as a charity is treated in the same way as a non-dependent. A much better option for anybody who wants to leave money to charity would be to withdraw it from superannuation before they die, make an immediate donation and claim a tax deduction.

However, if you are receiving Centrelink benefits, take advice before doing this, because the gift could be regarded as a deprived asset if it is over $10,000.

Strategies for avoiding death taxes

So, if the tax does apply, how is it calculated? It is a maximum of 17%, not a flat 17%, and is deducted by your superannuation fund before paying your beneficiary the death benefit. The tax paid is recorded on a PAYG payment summary (similar to wages). When your beneficiary lodges their personal tax return, the assessable amount received and PAYG withheld must be reported. If they have a high income, or if the sum is large, the tax is rebated so that no more than 17% is payable. If they have a low income, they may receive a refund of the tax paid by your super fund.

If you are considering a binding nomination, make sure you clearly understand the implications before setting it up. Once a valid binding nomination is in place, the trustee may lose the discretion to distribute the proceeds of the deceased’s superannuation fund in the most tax-effective manner.

The simplest way to avoid the death tax is to make sure you have given a trusted person an enduring power of attorney, with instructions to withdraw your superannuation in full if it appears that death is imminent. There would be no tax on the withdrawal, and the money could then be distributed in accordance with the terms of your will after your death..

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Whose advice are you listening to?

The other day, I contacted one of our clients to let her know her insurance policy premium was overdue and that the policy would lapse if it remained unpaid.

For privacy reasons I will name her Sandra. Sandra said that, following the advice of her “trusted” accountant, she will allow this policy to lapse as her circumstances have now changed

What were her new circumstances? Very sadly, her husband had been diagnosed with a terminal brain illness. What was the accountant’s advice? To allow her Income Protection policy to lapse and redirect the “saved premiums” to mortgage repayments.

On several levels, the accountant has not acted in the best interests of his own client, Sandra.

  1. What happens to Sandra and her family should she find herself, through illness, unable to work and earn an income to pay for her living expenses?
  2. Has Sandra’s overall position (financial and her own health) been taken into account when advised to cancel her insurance policy, which Sandra has had for seven years (health can often change in that period of time…)
  3. Just as importantly, the accountant has advised in an area in which he is not qualified to advise in.

The above scenario happens all too often. Consequently, the following points need to be kept in mind before acting on any such advice:

  1. Is the person providing me with advice, qualified to do so? We are often tempted to act quickly, and irrationally, on information obtained over the fence, at the bar-be-que or at the hairdressers, when it comes to investments and personal insurance protection; and
  2. What is the underlying motive of the person providing me with the advice? In particular is the advice in my best interests and based on a full understanding of my particular circumstances?

So, in summary, when you share your financial circumstances seeking advice, you need to speak to an expert in that area, ensure the expert knows the full details of your circumstances, and that any advice is in your best interests.

For an appointment with a qualified Wealth Adviser, contact us at info@ofm.com.au or phone at 1300 761 669 for financial consultation.

Corporate Authorised Representative of Total Financial Solutions Australia Limited
ABN 94 003 771 579   AFSL 224954

COUNTING THE COSTS OF LIFE INSURANCE

It probably comes as no surprise to anyone that there is a significant underinsurance gap between what we would need to maintain our standard of living should the unthinkable happen, and what we are actually covered for in the way of insurance. Australia is one of the most under-insured nations in the developed world, ranking 16th for life insurance coverage. [i]

There are lots of reasons people give for not buying life insurance, but top of the list is invariably cost. Sounds reasonable enough, especially when households are under pressure from increases in the cost of living. But dig a little deeper and it turns out the way we weigh up decisions when outcomes are uncertain is not always in our best interests.

According to something called Prospect Theory, people fear a certain loss more than they value a larger but uncertain gain.[ii] We tend to view money spent on insurance premiums as a loss, unlike money spent on a daily cup of coffee, a pair of shoes or a weekend away, which deliver immediate rewards.

There’s also a disconnect between what we say we value and what we spend our money on.

Thinking about the unthinkable

When asked, most people say the thing they value most is family. Yet when it comes to insurance many of us cover our car and our home but overlook our most important assets – our life, our ability to earn an income and the well-being of the people who depend on us.
Thinking about being diagnosed with a terminal disease, suffering a disabling accident or contemplating your own death or that of your partner can be very uncomfortable. Seeking cover for those possible eventualities is something that is very easy to put off or avoid altogether.

Although it is uncomfortable facing the thought of not being there for your family, the real value of life insurance is that it buys peace of mind that if we die or become seriously ill and are unable to work then the right amount of money will go to the right people when they need it most.

Types of life insurance

There are three main types of life insurance. Death cover provides a lump sum if you die or are diagnosed with a terminal illness; total and permanent disability (TPD) pays a lump sum if you are permanently disabled due to an accident or illness and unable to work; and Income Protection provides a monthly payment if you can’t work for a period of time due to illness or injury.

The amount of life insurance you need depends on your family circumstances, your income and lifestyle. While many working Australians have default cover in their super fund, that’s no cause for complacency. It’s often a basic level of cover which may need to be topped up either inside or outside super.

Take Chris, aged 30. He has a partner, two children and the median level of default life insurance cover in super for someone his age.  That is, $211,000 in death cover, $162,500 for TPD and $2,250 a month for income protection.[iv] According to a recent report by Rice Warner, the amount someone in Chris’s position needs is closer to $704,000 of death cover, $910,000 of TPD cover and $4,150 a month of income protection.[v]

Paying for a peace of mind

Paying life insurance premiums won’t provide the instant pleasure hit of an espresso, but most people would be surprised to know that the peace of mind that comes from protecting their family’s financial security costs less than their daily cup of coffee.

Rice Warner estimates the cost of death of and TPD cover for the average working Australian at less than 1 per cent of salary, and less than 0.5 per cent for white collar workers.[vi] Which begs the question, what cost do you put on the wellbeing of the people you love most?

If you would like us to help you work out the appropriate level of life insurance for your family, and the best way to achieve it, give us a call.


[i] Swiss Re Economic Research & Consulting , 2007
[ii] Prospect Theory, Wikipedia, https://en.wikipedia.org/wiki/Prospect_theory
[iv] Under-insuranced in Australia 2017, Rice Warner, p.20.
[v] Ibid, p.10.
[vi] How affordable is group insurance in superannuation, Rice Warner, December 2016,
Corporate Authorised Representative of Total Financial Solutions Australia Limited
ABN 94 003 771 579   AFSL 224954
Discover how the inner circle can help you
Contact us today for a financial consultation.

info@ofm.com.au | 1300 761 669 | www.ofm.com.au

ODYSSEY Magazine | Autumn Edition 2016

In this edition of Investment Solutions magazine, we take a look at strategies to help you make the most of the end of the financial year. There are a range of ways to access income through your investments and we discuss some options that may be suitable for you. BT Financial Group Chief Economist, Chris Caton, provides an update on the wellbeing of the Australian economy. Finally, we share some signs you’re in need of a career change and highlight 5 key steps to help you realise the move.
From our team, we wish you and your family a safe and happy Easter. For a full version of our newsletter, please click here  Investment Solutions Magazine Autumn 2016

Until next time – happy reading.

ODYSSEY Magazine | Summer Edition 2015-16

In this edition of Investment Solutions, we take a look at the Australian property market and now things could be shaping up the years ahead.

With interesting rates at historically low levels, we discuss different options to position your portfolio and maximise returns.

In our economic outlook, we hear from prominent economists to understand if Australia is heading into recession.

Planning a holiday? We share 5 ideas that can help you get there without all the financial stress.

From our team, we wish you and your family a safe and happy new year. For a full version of our newsletter, please click here. Until next time – happy reading.

 

Can you afford not to have Trauma cover?

The daffodil is Australia’s symbol of hope. Each year, the iconic yellow flower blooms for Daffodil Day; one of Australia’s best known and most popular fundraising events.

Every day, around 350 Australians are diagnosed with cancer. But every day there is more reason for hope than ever before. Cancer research is discovering new and better treatments, cancer prevention campaigns are working and support for those affected by cancer is improving all the time. But with figures shockingly this high, it’s likely we’ll all be touched by cancer, either personally, or through a friend or family member.

Daffodil Day raises much needed funds for Cancer Council to continue its honorable work in cancer research, providing patient support and prevention programs for all Australians. However, organisations like Cancer Council also need your support. You can help this year by selling Daffodil merchandise, hosting a yellow morning tea or simply by spreading the message on social media.

Today is Daffodil Day. And we encourage everyone to get involved, in the hope that one day, we will find a cure. To make a donation or to find out more, please visit www.daffodilday.com.au

Can you afford not to have Trauma cover?

Life is full of surprises. From marriage and kids to travel and promotions, there are so many adventures to be had. However, for some of us, life’s little joys can be interrupted by sudden illness. Even the healthiest people are diagnosed with illnesses they have little chance of preventing – like cancer.

If this does happen, we understand this time can be extremely difficult. Ideally, you should be focusing on your health and recovery, not monetary problems. Trauma cover can help by providing a lump sum payment that you can use any way you like to help ease any financial pressure. You can reduce your mortgage, pay for specialist medical care, travel, or cut back at work so you can spend more time with the family.

For further information about protecting your future, please contact us via email at admin@ofm.com.au or by calling us on 1300 761 669. And in the meantime, please support Daffodil Day.

Discover how the inner circle can help you. Contact us today for a financial consultation.

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs.
Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
Odyssey Financial Management is an authorised representative of Total Financial Solutions Australia Limited.