Superannuation has many tax advantages. There are concessions when people contribute, on the ongoing earnings in the fund, and when members retire. However, there can be a nasty tax surprise for some beneficiaries after the retiree passes away. The cost could run to tens of thousands of dollars.

Until last financial year little could be done about it in most cases. The only solution was to cash in the super benefit while the owner was alive, which they could do tax-free. If only they knew when they were going to check out!

The superannuation rules changed from July 2022 so some retirees can now take steps to reduce or eliminate the impact of this tax. It is well worth retirees investigating what the likely future liability will be and if it can be reduced, with a financial adviser.

Super benefits received by a spouse pass tax free. They are also tax-free to dependent children. They are not tax-free to adult children or other relatives. The tax is usually 17 per cent including Medicare Levy. So on $300,000 of taxable benefit that would be $51,000 tax to pay.

Each super benefit is made up of a taxable component and a tax-free component. The taxable component is subject to this costly levy and is usually the much larger portion of the benefit. However each person’s account details are different.  

Withdrawing money from a super accumulation or pension account and then recontributing it back into super without claiming a tax deduction can move money from the taxable component into the tax-free component. Once over age 60 and retired, or over 65, withdrawals are unrestricted.

However there are strict limits on super contributions and hefty penalties apply if they are breached. So the recontributions must be carefully planned.

Until July 2022 retired people over age 65 could not make super contributions at all. Then the rules changed so people under age 75 can now make non-tax-deductible contributions. They are allowed to put in up to $110,000 in each financial year.

They can also bring forward two future years of contributions so $330,000 can be put in immediately, provided no more contributions are made until three years have passed.

So a withdrawal of $330,000 followed by re-contribution can greatly reduce or eliminate the potential tax on beneficiaries after death. If the super account is larger than that figure multiple transactions will need to be made over several years to eliminate the future tax.  

It is essential to plan these more complex strategies correctly to avoid penalties and achieve the best outcome. Professional advice can help.