Tax and the super after-life

Many people assume there is no tax payable on super benefits received after someone passes away, but that’s not always the case.

Whether or not tax is paid on a super death benefit depends on the beneficiary’s relationship with the deceased. Although some beneficiaries receive their money tax-free, others can find themselves paying significant amounts of tax on the funds they receive.

Dependant for tax purposes

The key point in understanding who will be required to pay tax on a super death benefit is whether or not the beneficiary is considered a death benefit dependant for tax purposes.

Although you are permitted to nominate a wide range of people as dependants under super law, the definition for tax purposes is different and narrower.

A death benefit dependant for tax purposes is limited to the deceased’s spouse, de facto, or former spouse or de facto; their child under age 18; any person with whom they had an interdependency relationship; and any other person financially dependent on them just before their death.

A common trap in this area is nominating financially independent adult children as death benefit beneficiaries, as this is permitted under super law. Under tax law, however, they are not defined as dependants for tax purposes and so are required to pay tax on the taxable component of any death benefit they receive.

Tax on lump sum death benefits

When it comes to paying a death benefit, your dependants for tax purposes are free to choose whether they want to receive your super death benefit as a lump sum or as an income stream.

If a beneficiary decides to take their benefit as a lump sum, the benefit will be free of any tax, provided they are considered a death benefit dependant under tax law.

If they are not considered a death benefit dependant for tax purposes, they must take the benefit as a lump sum. These lump sums are taxed at a maximum rate of 15 per cent plus the Medicare levy on the taxed element (which is super that has already had tax paid on it within the fund).

In addition, any untaxed elements of the taxable component in the lump sum will be taxed at a maximum rate of 30 per cent plus the Medicare levy.

If the benefit is paid to the estate, it is paid as a pre-tax lump sum and the estate is responsible for paying any necessary tax depending on the dependant status of the end-beneficiaries.

Death benefit income streams and tax

Some tax dependants prefer to take their death benefit as an income stream (or pension).

Death benefit income streams are tax-free if either the deceased or the beneficiary are aged 60 or older at the time the income stream payments are made.

Otherwise, beneficiaries will generally pay some tax on the death benefit income stream until they reach age 60, after which age the payments are tax-free.

For beneficiaries under age 60, there is no tax on the tax-free component of the death benefit income stream, but the taxable component is included in their assessable income with a 15 per cent tax offset.

Death benefits and the transfer balance cap

The transfer balance cap (TBC) rules also come into play when it comes to super death benefits.

These rules limit the amount of super savings you can transfer into the retirement or pension phase.

Tax penalties apply if amounts in excess of the beneficiary’s TBC are transferred into the retirement phase as an income stream.

The rules governing this area are very complex, so you should always seek professional advice before deciding on a death benefit nomination, as it can make a big difference in how much tax your beneficiaries will pay when they receive their death benefit payment.

If you would like more information about tax and super death benefits, call our office today.

Your guide for claiming business expenses

You can claim tax deductions for expenses you incur while running your business if they’re directly related to earning business income (also known as assessable income).

Take Rubi for example. Rubi is a sole trader who works as an IT consultant. As part of her work, she travels to deliver seminars and workshops.

Rubi follows the 3 golden rules for claiming a tax deduction when she travels for business purposes.

  1. The expense must be for her business, not for private use.
  2. If the expense is for a mix of business and private use, she can only claim the portion that is used for her business.
  3. She must have the records to prove it.

Rubi uses the myDeductions tool to store receipts of all her airfares, accommodation, public transport costs, ride-sharing fares, car hire fees and other costs such as fuel, tolls and car parking. She also records her meal costs if she’s away overnight.

Rubi also keeps a travel diary to note which expenses were for business purposes and which expenses were private, such as sight-seeing. The cost of her recent tour of the Tower of London is not included in her deductions. There are some expenses Rubi can’t claim, such as entertainment, traffic fines, and expenses related to earning non-assessable income.

As an employer, Rubi meets her superannuation and employer obligations by reporting her employees’ salaries or wages and paying any tax withheld amounts on time. This allows her to deduct the salaries, wages and super contributions she’s paid during the year.

By the time Rubi is ready to lodge her tax return, her tax agent has everything they need to verify her deductions.

Be like Rubi and perfect your record keeping to correctly claim your business expenses and make tax time easier.

To check your record keeping skills, you can use this record keeping evaluation tool.

Remember, we can help you with your tax and super.

Source: ato.gov.au August 2023
Reproduced with the permission of the Australian Tax Office. This article was originally published on https://www.ato.gov.au/Business/Small-business-newsroom/General/Your-guide-for-claiming-business-expenses/.
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Market movements & review video – November 2023

Stay up to date with what’s happened in markets and the Australian economy over the past month.

October was a volatile month on the global stock markets and in Australia. The local sharemarket finished October down 3.8 per cent, representing a third straight month of losses.

Investor sentiment reflected heightened anxiety regarding inflationary pressures and uncertainty over rate rises, mixed economic data and concerns about the Israel-Hamas conflict.

Investors are continuing to keep a close eye on oil price movements over fears of an escalation of conflict in the Middle East.

Click the video below to view our update.

Please get in touch if you’d like assistance with your personal financial situation.