How the death tax applies to insurance policies held in super | Money

By | March 2, 2021

But tax may be payable on the proceeds of the policy if it is left to a non-taxdependant. Often a young single person has, say, $ 300,000 of death cover through their work super fund. They are unlikely to have tax dependants, so if they were killed in a car accident the tax office would take around $ 100,000, leaving around $ 200,000 in their estate.

Where tax is payable by an estate the tax becomes a general liability of the estate.

Think about a single father aged 50 with three adult children who all work – one of them lives at home with him. His house was worth $ 380,000 in 2008 when his will was drafted. He has $ 300,000 in super fund A, and just $ 15,000 in super fund B. There is also a $ 300,000 insurance policy in super fund B – this is this fund that is paying the premiums because it has the smallest balance.

He wanted his will to treat his children equally. Therefore, it was drafted to give the first child the proceeds of fund A, the second child the proceeds of fund B and the residue of his estate to child three who was living at home. The father figured that would be the house and the contents.

Unfortunately the will drafter didn’t understand the effect of the death tax on insurance policies held in superannuation.

When the father died suddenly the children got a terrible shock when they discovered they were not going to be treated equally at all.

Ordinarily it would be thought that the first child would receive around $ 255,000 as the proceeds from fund A would be taxed at 15 per cent, while the proceeds of the insurance policy held by fund B would yield approximately $ 215,000 after the tax of approximately $ 100,000 was deducted.

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Life insurance proceeds held within superannuation suffer a much higher tax than ordinary superannuation benefits because they are treated as “untaxed” and are subject to 30 per cent tax (excluding Medicare levy) when paid to a non-dependant.

Problem one! Super funds do not deduct the death tax and send the balance to the estate. Rather, they send the entire amount to the estate – it is the estate which has the obligation to send the death tax to the ATO.

Problem two! Because the will specifically gave “the proceeds of fund A” to the first child and “the proceeds of fund B” to the second child they would be entitled to the whole of $ 300,000 and $ 315,000 respectively.

The tax still has to be paid – it just won’t be coming out of the proceeds received from either of fund A or fund B. The executor of the estate has a responsibility of paying $ 145,000 to the Tax Office ($ 45,000 death tax on fund A and approximately $ 100,000 death tax on fund B).

Because children one and two have received specific bequests, the tax can only be paid out of the residue of the estate. Using a concept known as “marshalling” the executor will probably have to sell the home to pay the $ 145,000 tax bill leaving child three with net benefits of only $ 105,000.

Noel answers your money questions

I currently have a mortgage that is fully paid off, however it has a redraw facility that I have used to buy shares. Can I claim the interest from the redraw as a tax deduction, or would I need to have a proper home equity loan taken out for investing in shares to be able to claim the interest?

The interest on any money used to buy any income producing assets such as property or shares, is tax deductible. The only factor when determining deductibility is the purpose of the loan – the mechanics of financing it are not relevant.

I would like to know if an account-based pension affects the aged pension? Also, is it regarded as an asset by Centrelink?

When you start an account-based pension you are drawing an income from your superannuation fund. Until a person reaches pensionable age, Centrelink does not assess the value of your superannuation unless an account-based pension has been started. Once the account-based pension starts, the value of your account is assessed under the income test, and this balance is also subject to deeming to determine a notional income for the income test. The amount you draw is not relevant.

I have been trying to understand exactly what happens to the transfer balance cap (TBC) of someone in pension mode when the TBC is indexed. I’ve read the ATO’s attempts to explain the change four times and I’m no closer to the answer! Could you give an example of someone in pension mode with an existing TBC of $ 1.5 million.

As from July 1, 2021 the general transfer balance cap will increase to $ 1.7 million. Depending on your personal circumstances this will introduce a personal transfer balance cap. This information will be available on-line through your personal myGov account. The change will effect you differently based on the highest ever balance in your transfer balance account.

If you have never started a retirement income stream, and your transfer balance account is nil, your personal TBC will become $ 1.7 million. However, if your TBC has been $ 1.6 million before July 1, 2021 it will remain at $ 1.6 million and no indexation will be applied.

If your transfer balance account is below $ 1.6 million you are entitled to a proportional increase to the cap consistent with the unused portion of the cap. Suppose a person is in pension mode with an existing TBC of $ 1.5 million and that represents the highest ever value.

The portion of unused cap is 6.25 per cent ($ 100,000/$ 1,600,000×100). The amount of proportional increase is $ 6250 ($ 100,000 x 6.25 per cent). The personal transfer balance cap from July 1, 2021 will be $ 1,606,250. In this example the person would be entitled to put an additional $ 106,250 ($ 1,606,250 – $ 1,500,000) into pension phase from July 1, 2021.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email:

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