Some weeks ago this column covered the opportunity to build up superannuation balances using non-concessional contributions, especially for those approaching retirement and recently retired. These contributions also provide another valuable opportunity – to reduce super inheritance tax.

Superannuation is very tax-sheltered. There are tax concessions on contributions. In accumulation mode earnings are taxed just 15 per cent on income and 10 per cent on realised capital gains. In pension mode there is no tax on earnings and no tax on the pension payments to the retiree.

However, there is a serious sting in the tail. Most super accounts will be taxed 17 per cent on most of the death benefits paid to most beneficiaries. So for example a $300,000 payout after death is likely to be taxed about $50,000. Tax applies to the ‘taxable component’ paid to non-dependents.

Non-dependents include adult children, nieces and nephews. They will pay 17 per cent tax including Medicare Levy. Gifting super to charity on death will see the charity pay 15 per cent tax. It won’t have to pay the Medicare Levy.

All super accounts are divided into a ‘taxable component’ and a ‘tax-free component’. Employer, salary sacrifice, and tax-deductible contributions go into the taxable component. So do all account earnings while in accumulation mode.

Only non-tax-deductible or non-concessional contributions go into the tax-free component. They provide the opportunity to reduce the tax on death benefits.

A super fund member who has retired after age 60, or is over 65, can make unlimited lump sum withdrawals from their super account tax-free. Drawing cash out and recontributing it without claiming a tax deduction moves money from the taxable component to the tax-free component.

The limiting factor is on contributions. Non-concessional contributions are not allowed from age 75 on. However, a few years ago the rules were changed to allow people up to age 74 to make these contributions, even if retired.

The maximum annual contribution is $120,000. People can also bring forward two future years’ contributions and put in $360,000 immediately, with no further amounts allowed for three years.

People with super balances above $360,000 will need to complete the withdrawal and recontribution process in two or more stages over several years. It is best to recontribute to a new super account rather than the existing one, and maintain two accounts during this process.

Now is a good time to make a plan and act before the end of the financial year to reduce the super inheritance tax as much as possible.