Legal Tax Loopholes to Avoid Tax on Super... When You Die

Superannuation is a great tax structure. That’s because while you’re working, your super earnings and contributions are only taxed at 15% — way lower than your regular income. And once you hit retirement and switch your super into an account-based pension, any earnings on that pot (up to $1.9 million) are taxed at a whopping... zero percent. That’s right — nada. Zilch. It’s like legal tax magic.

But — and there’s always a “but” — while super is a fantastic way to grow your money during your life, there’s a nasty little surprise that could hit when you die. And it’s got to do with who ends up with your super and how the tax rules treat them.

Who Gets Slammed With Additional Tax?

If your super goes to your spouse or a child under 18 (or someone who’s financially dependent on you), they’ll get it tax-free. No dramas.

But if it goes to, say, your adult kids or your estate (and they’re not financially dependent on you), then the Tax Office comes knocking. They’ll take 15% of the taxable portion of your super, or up to 30% if there’s an untaxed part (less common, but still worth knowing). That means your adult kids could lose a big chunk of their inheritance to the taxman. Ouch.

Let’s Break It Down

Take Bill, for example. He was 78 and had $1.3 million in his super when he passed away:

• $200,000 was tax-free (from non-concessional contributions)
• $1.1 million was taxable (from taxable contributions)

He  left the lot to his two adult kids. The $200k? No tax. But that $1.1 million? That’s where it stings. They’d cop 17% tax on it (which includes the Medicare Levy), meaning the tax office walks away with around $187,000. That’s serious money.

So What Can You Do About It?

Good news: there are ways to soften the blow — but you need to plan ahead. Here’s a few strategies. But, make sure you seek professional advice on what is the best solution for you, as everyones situation is different. 

1. The “Take It Out Before You Die” Plan

You could withdraw your super before you die and gift it while you’re still around. The catch? You’d need a crystal ball to time it right. If there is a significant tax saving to be made, you might consider cashing in your super before you die and investing it  in your own name.  Thish means it can then be passed on to your non-dependants tax-free and save you thousand of dollars. 

2. The “Withdraw and Re-Contribute” Trick

This is the big one. You take money out of your super, then tip it back in as a non-concessional (after-tax) contribution. That turns some of the taxable component into tax-free money. No extra cash needed — you’re just reshuffling the deck.

Thanks to changes in the rules from 1 July 2022, even folks over 67 can now make these non-concessional contributions (as long as your total super is under $1.9 million). You don’t even need to meet the old “work test” unless you’re making tax-deductible contributions.

This strategy can help reduce the tax your adult kids might cop, balance super between couples, and generally keep more money in the family — and out of the taxman’s pocket.

3. Set up “Testamentary Trust”

Let me cut to the chase: whether someone counts as a ‘dependent’ for tax purposes? That’s not guesswork — it’s based on cold, hard facts at the time you cark it. But here’s the good news: with the right steps in place, you can pass your super to your loved ones without getting slugged with a nasty tax bill from the ATO.

Here’s how you do it (in plain English):

This sounds fancy, but it’s really just a protective bucket in your Will. You pour your super into it, and it can shelter your loved ones from the Super Death Tax — which can take up to 17% of your hard-earned super if you’re not careful.

Here’s a clever trick: if your grandkid is financially dependent on you — say, you cover their $20,000 private school fees every couple of years — then legally, they may count as a tax dependent. That can make a world of difference when the tax man comes sniffing around.

The trust can hang onto your super for up to 80 years after you die. During that time, your kids (as trustees) can divvy up the income — and because it’s going to tax dependents, it sidesteps the Super Death Tax. And when the clock hits 80 years? Whatever’s left goes to your grandkid (or their family, if they’ve passed on).

This option is a bit more complex because you have to have a 'dependant' at the time of your death, but if you are considering a Testamentary Trust for asset protection  reasons, this can be an advantage.

The Bottom Line...

If you’ve built up a tidy nest egg in super and reckon you won’t spend it all, it’s worth thinking about what happens when you’re gone. With a bit of planning, you can save your loved ones from a nasty tax bill. Don’t just leave it to chance — get some sage advice by contacting us today.

Chris Tolevsky is a Specialist Medical Accountant with over 30 years experience in the medical and allied health fields.  He provides expert guidance on tax strategies, building and protecting wealth . If you’re interested in discussing how we can help you please book a complimentary consultation. 

Disclaimer: This article contains general information only . It is not designed to be a substitute for professional advice and does not take into account your individual circumstances, so please check with us before implementing this strategy to make sure it is suitable