As more Australians build substantial super savings, the likelihood of triggering a 17% tax when those assets are inherited also increases. Without early planning, families may need to sell assets to cover tax bills, which is a costly risk that continues to grow.
Superannuation remains a tax-efficient way to save for retirement, but it carries unexpected consequences when passed to beneficiaries. If super is left to non-dependents such as adult children, then the taxable component may be hit with a 17% tax. Many families are caught by surprise, since Australia does not have a formal inheritance tax.
A recent report from an advisory firm points to this issue as part of a $3.5 trillion intergenerational wealth transfer. Financial advisers now recommend two common strategies to reduce this risk - recontribution and full withdrawal. Recontribution involves retirees withdrawing money, then re-contributing it to super as non-taxable contributions to reduce future tax burdens. A full withdrawal distributes the funds directly, bypassing super's death benefit tax, but can expose the money to other taxes outside the super system.
Each option has trade-offs. Recontribution keeps funds in a tax-friendly environment, while withdrawal removes the risk of the super inheritance tax but may lead to higher tax rates on earnings. Timing is critical, especially as larger super funds can be slow to process transactions. This delay can be a problem for families facing terminal illness or managing elderly relatives.
Advisers say best outcomes occur when planning is done well before retirement. With more than 700,000 Australians expected to retire within five years, the opportunity to act early is limited. Annual increases in compulsory super guarantee contributions are also driving quicker balance growth and tax exposure.
Estate planning and tax policy are expected to be discussed at the upcoming federal economic roundtable. Potential changes to family trusts and capital gains tax concessions may follow, but for now, managing super inheritance remains one of the most pressing tax planning issues. Early action and clear strategy are essential to protect family wealth and avoid unnecessary tax burdens.
