The largest tax on an Australian family, and nobody sends a warning letter

Most people believe superannuation is tax free after 60. It is — right up until they die.

There is no inheritance tax in Australia and this is not one. It is a rule in Division 302 of the Income Tax Assessment Act 1997 that taxes the taxable component of a superannuation death benefit when it is paid to somebody who is not a death benefits dependant. A spouse is one. A child under 18 is one. An adult child who is not financially dependent is not, and that single gap is where the whole tax comes from.

Nobody has a duty to raise it. A fund administers the account and pays the benefit. An accountant sees the tax return rather than the nomination form. A solicitor drafting a will is frequently never told about the superannuation at all, because superannuation does not automatically form part of an estate. So the first time most families see the figure is on a payment summary, months after a funeral, when the components have already been fixed and nothing can be changed.

The tax free half of a superannuation balance is a fixed number of dollars. Every dollar the fund earns lands on the taxed half, so the exposure rises every year on its own while nobody is looking at it.

What it works out

• The tax as it stands today, exactly, from the balance and the taxable component on a member statement — split into the taxed element, any untaxed element and the Medicare levy.
• What that bill becomes over the years ahead, because the taxable component compounds and the tax free component does not.
• Every lawful arrangement, priced and ranked on one stated measure: what actually reaches the beneficiaries after every tax on the way.
• The re-contribution ladder, cycle by cycle — what each one converts, how many fit before the contribution age limit, and where the returns stop being worth the paperwork.
• The untaxed element under section 307-290, worked out on the member's own service period, which is what turns 17% into 32% on part of a benefit with insurance behind it.

taxable component × the share going to non-dependants × 17% = the tax

What the full report adds

1. Every arrangement in order, to the dollar. What each one leaves the beneficiaries in the year chosen, and how far behind the leader each of the others is.
2. The ladder, cycle by cycle. How much each re-contribution converts, why each one converts less than the last, and which of the three limits — the cap, the balance or age 75 — is the binding one.
3. The estate route priced separately. The Medicare levy is not imposed on the trustee of a deceased estate, and what that is worth against what it costs in exposure to a family provision claim.
4. Where the answer changes. Every return from 2% to 10%, every period from one year to thirty, and the year at which holding the money outside superannuation stops being worth it.

What it will not do

It will not tell you what to do. It ranks every arrangement on one arithmetic measure and never calls one the best, because that is a personal recommendation and this is an information service rather than a licensed advice service. The components of a superannuation interest are worked out by the fund, and the fund's figures govern rather than an estimate typed into a form.

There are also things the measure cannot see, and the report names them on the page rather than burying them: whether the money can be afforded to be moved at all, what a withdrawal does to an age pension or an aged care means assessment, whether a family provision claim is likely, what a will says, and what a fund's own trust deed permits. A licensed financial adviser is the person who can recommend a course of action, and anything involving a will or a nomination is a solicitor's work.