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Death and Taxes
If you’re thinking about how your wealth will be passed on to loved ones, you might have heard the term “death tax.” While Australia doesn’t have a formal death or inheritance tax, there is a little-known tax that can apply to superannuation death benefits, especially when they’re paid to adult children or other non-dependent beneficiaries.
What Is the “Death Tax” on Superannuation?
When someone passes away, their superannuation is usually paid out to their nominated beneficiaries. If that beneficiary is a spouse, child under 18, or someone financially dependent, the payment is tax-free.
However, if the beneficiary is an adult child or another non-dependent, the taxable portion of the superannuation may be taxed at 15%, plus a 2% Medicare levy—a total of 17%. This is what many people refer to as a “death tax.”
Understanding the Taxable and Tax-Free Components of Super
It is a little known fact that your superannuation balance is made up of two parts:
Tax-Free Component
This includes:
- Contributions made from after-tax income (called non-concessional contributions)
- Government co-contributions
- Certain rollovers
This portion is always tax-free, no matter who receives it.
Taxable Component
This includes:
- Employer contributions
- Salary sacrifice contributions
- Personal contributions claimed as a tax deduction
- Investment earnings within the fund
This taxable portion may be taxed if paid to a non-dependent beneficiary.
A Real-World Example
Let’s say your superannuation balance is $1 million, and $800,000 of that is taxable. If it’s paid to an adult child, the tax could be:
$800,000 × 17% = $136,000
That’s a significant amount that could otherwise go to your family.
How You Can Reduce the Tax Impact
There are strategies available to help reduce or even eliminate this tax:
- Withdrawal and Re-Contribution Strategy
You may be able to withdraw some of your super and re-contribute it as after-tax (non-concessional) contributions, increasing the tax-free portion. Note, this is only possible if you have met a condition of release to be able to access your Superannuation tax free. Refer to our Withdawal and Recontribution blog post for more information.
It is highly recommended that you discuss this complex strategy with your financial adviser to see if it is right for you.
- Review Your Beneficiaries
Make sure your super is set up to go to tax dependants where possible, such as a spouse or financially dependent child.
- Estate Planning Advice
Work with your financial adviser to explore options like withdrawing super before death (in certain circumstances) or restructuring your estate to minimise tax.
Why This Matters
Many Australians are unaware that their superannuation could be taxed when passed on to adult children. By understanding how your super is structured—and acting early—you can ensure more of your wealth goes to the people you care about.
Need Help?
If you’d like to review your superannuation and estate planning strategy, we’re here to help. Contact our team to book a personalised consultation and explore ways to protect your legacy.
Disclaimer:The information in this blog is general in nature and does not take into account your personal financial situation, objectives, or needs. Before making any financial decisions, you should consider whether the information is appropriate for your circumstances and seek professional advice from a licensed financial adviser.
