Some would have us believe that there are no ‘death taxes’ in Australia, but there are, & they are hidden, & whilst we continue to remain complacent the ATO will continue to amass hundreds of millions of dollars every year from these unnecessary taxes.

So how can you tell if your family will be paying these hidden ‘death taxes’?

It’s really simple – take a look at your most recent superannuation statement & you will notice that it includes your member balance, perhaps some insurances, fees etc., but now look at who is nominated as the beneficiary should you pass away. Is it your spouse? To receive 100% as a Lump Sum?

If this is the case then it is highly likely that your family will be paying unnecessary tax, & they will be paying this tax for a long period of time!

The main reason why most Australians choose this option on their beneficiary forms is because they are not aware of any other options. So let’s examine what actually happens when we choose this option:

We know that most Australians are, unfortunately, under-insured. I am not sure why this continues to be the case but perhaps it has something to do with our ‘she’ll be right’attitude. Let’s assume for a moment, however, that you have an average superannuation member balance (say $150,000 +) plus a reasonably healthy level of life insurance (e.g. $1M +). Don’t worry too much about the figures as it is all relative. I understand that levels will be higher/lower for different age groups & different states.

Assuming also that you have an average level of debt (say $400K +) then, should you pass away prematurely, your spouse will be left with over $700K once debt & final expenses have been paid. It’s true that this initial lump sum will be received by your spouse tax-free, however it is what happens with this excess amount that results in unnecessary taxes being paid:

  • Your spouse invests the $700K in his/her name – earnings on this investment will be taxed at your spouse’s marginal tax rate &, in many situations, may actually tip them into the next tax bracket;
  • The family has not only lost you, but now they will incur the cost of replacing you – this could take the shape of a housekeeper, or nanny, or perhaps replacing the income that was paying the private school fees & music lessons. All of this is an ‘after tax’ cost.

Some Australians have taken the step of obtaining a Testamentary Trust Will to ultimately receive proceeds from superannuation & life insurance, which is a great option for protecting family assets & distributing income to beneficiaries, but there is another option that provides, in my opinion, our greatest opportunity to maximise family income & minimise our family’s future tax liabilities – Death Benefit Pensions.

The concept of Allocated Pensions was introduced into this country in 1994, & legislation has permitted financial dependents, including minors, to receive tax-free income via superannuation death benefit pensions. This simply allows families to spread the income, reducing, if not eliminating, the taxation liability completely.

As Kerry Packer once famously quoted during a senate enquiry:

“I am not evading tax in any way, shape or form. Of course, I am minimising my tax. Anybody in this country who does not minimise his tax wants his head read. I can tell you as a government that you are not spending it so well that we should be donating extra!”

Earnings on death benefit pension accounts are not taxed. That’s right, ZERO tax on the earnings.

All financial dependents (as per SIS legislation) who receive the pension payments are taxed at adult marginal rates, regardless of age. When you take into consideration our current tax-free threshold ($18,200), plus the Low Income Tax Offset, plus a draw-down of the original capital (which is also tax-free) then a financial dependent, who is not receiving any other form of income, could receive as much as $49,752.68 per annum from a death benefit pension before any tax would need to be paid. That’s potentially $150,000 per annum tax-free for a widow/er with 2 dependent children!

Why are Australians not being told this? Why isn’t this information being shouted from the roof tops right around this great country of ours so that every Australian family can take advantage of this? I think we all know – because, sadly, it is so easy for the government to take money from the uninformed.

We do have some terrific tools available to us to protect our assets, maximise our income & minimise our taxes. Perhaps ‘she won’t be right’. Perhaps it is time to become informed.

Before adopting this strategy you should seek professional advice from your financial planner and/or accountant to ensure that it is appropriate for your circumstances. Points to consider will include:

  • The age of your children;
  • Children with special needs;
  • Other income sources etc….

Please don’t hesitate to connect with or contact me should you require further information.