Question 1
I am 73 years old and have superannuation of $900,000 in a Commonwealth Superannuation Scheme account that I wish to leave in my will to my three sons, who are all over 40.
I am advised that if I die with this money still in super, I will be charged 30 per cent tax. How can I avoid this tax?
A common strategy to reduce future taxes paid by your beneficiaries is withdrawing funds from super (if you have access), either within accumulation or pension phase, then re-contributing back to super.
The purpose of this is to convert “taxable” super components into ” “tax-free” super components.
Why do this? Because when you pass away, your taxable component will be taxed if it is paid to beneficiaries not listed below:
- Spouse;
- Child under 18;
- A person with whom the deceased person had an interdependency relationship just before they died;
- A person who was financially dependent on the deceased person just before they died.
Most people’s super balances will have a high percentage of taxable component, as this is where all salary sacrifice, employer super guarantee contributions and interest goes to.
Technically, it’s referred to the taxable (taxed element). And it’s taxed at 15 per cent plus Medicare levy when paid to a beneficiary not listed above (Medicare levy is not payable if it gets paid to your estate instead of a beneficiary directly).
For yourself though, as you are in a CSS – which is an “untaxed” fund – you may have a high percentage taxable (untaxed element). This is taxed at 30 per cent plus Medicare.
Any tax-free component is always paid tax free regardless of who gets the money. The idea is to reduce the taxed element and increase the tax-free element.
The steps to cash out and re-contribution are as follows:
- Confirm you can access your super – given your age, this is not a problem;
- Check with your super fund on the current composition (tax free/taxable taxed element taxable untaxed element). Note that withdrawals will be drawn out proportionally: (e.g. 80 per cent taxable, 20 per cent tax-free);
- Withdraw a lump sum;
- Re-contribute as a non-concessional contribution (NCC). These go to the tax-free component;
- Note that you have to be under 75 to make these contributions;
- See table below for maximum amount you can re-contribute.
The above is a high-level overview and there are a few traps in relation to the cash out and re-contribution strategy. Therefore, I would recommend seeking personalised financial advice or contacting the Commonwealth Super Scheme directly.
As I have mentioned previously, there are some calls to stop this strategy, as it is seen as a loophole by some, such as the Grattan Institute – a large, independent and influential lobby group that produced this report.
The government has not announced any plans to change these rules.
There are only a few other options to avoid this tax. Such as spend all your super before you die, or, ensure you withdraw all your money from super before you die.
Question 2
Hi Craig, thanks for your regular contribution.
I am 62 and recently retired, having transferred my super in accumulation phase to the maximum amount under the transfer balance cap to an account-based pension ($1.9 million) and drawing the minimum 4 per cent a year for living expenses.
I have had to leave about $700,ooo in accumulation phase due to the restrictions of the transfer balance cap.
My wife is 57 and works part time with no retirement plans on the horizon. She has about $600,ooo in super in accumulation phase, providing regular concessional contributions from her salary, and no history of non-concessional contributions.
I am wondering if you can identify any strategies that would better utilise the funds I am holding in my accumulation account.
Having funds in a superannuation pension is very tax effective:
- No tax at all on earnings made by the pension fund
- No tax on payments made by the fund to you (either via a regular income or lump sum withdrawals).
It’s so generous that there is a limit on how much an individual can have in these types of accounts. The limit is called, as you have stated, the “transfer balance cap”. And you have fully utilised yours.
Retaining funds in the accumulation phase of super does still offer tax benefits. As you are over 60, you can take money out at any time tax free. However, unlike pensions, the earnings within the fund are taxed up to 15 per cent (less any fund deductions).
You can receive income of about $22,575 (2025/26) outside of super and pay no income tax (the effective tax-free threshold).
Therefore, it might be worth holding some investments outside of super to take advantage of this.
The most obvious strategy is withdrawing some funds from your super accumulation and contributing them to your wife, as non-concessional (after-tax) contributions. She could then eventually start a pension with these funds.
Then, combined, you will have a very large part of your investments in a tax-free environment.
Your wife will be eligible to start a retirement pension the earlier of:
- Changing jobs or retiring from age 60
- Turning 65
She has plenty of room under the total superannuation balance, so you could gradually look to make withdrawals from your super and contribute into hers.
Just make sure you take into account the non-concessional caps, which restrict how much you can contribute in any one year.
Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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