When Super Outlives Its Usefulness
The taxation of superannuation death benefits in the hands of adult children means that the time may come where you and your clients face the fact that super has outlived its usefulness to them.
A superannuation benefit is fully exempt from tax when either taken by a person over 60 years of age, or when received as a lump sum by the spouse of a deceased member.
Where death benefits are paid to an adult child, however, to the extent that the benefits are not tax-free components the children will pay 16.5% tax. This amounts to $16,500 per $100,000 of taxable components. Evidently, this is a bigger issue for clients with larger super balances.
So, if your client is the surviving spouse and they are either becoming aged or are not well, it might be time to consider withdrawing some or all of their super and simply accepting that they will pay some tax on the earnings. As an example, $500,000 of taxable benefits would result in $82,500 tax payable in the hands of adult children, if paid as a death benefit. However, if $500,000 was earning 6%p.a., it would result in assessable income of $30,000 p.a . Even at a tax rate of 30%, tax would only be $9,000 p.a. Of course, every situation is different, however there are some circumstances where super is no longer the best decision for a client.