How will my super be taxed if I leave it to my kids when I die?

How will my superannuation be taxed when it passes to my daughters after my death? It is in pension mode, and all withdrawals are tax-free. When my daughters inherit their equal shares, will they be required to pay tax, or does its tax-free status continue? If tax is payable, would it be more beneficial to name my wife as the beneficiary so she can later transfer the funds to them? What effect would this have on her pension?

If you pass away while in pension phase, your super pension will cease, and your daughters can only receive the remaining balance as a lump sum. Whilst withdrawals you make are tax-free, the taxable proportion of lump sum death benefits paid to your daughters (non-tax dependants) will be subject to tax at 15 per cent, plus the 2 per cent Medicare Levy.

If you’re not careful, your children could be left with less than you think when you die.Credit: Simon Letch

If you changed the beneficiaries from your daughters to your wife, then she can receive a tax-free lump sum death benefit. However, the amount received by your wife will be assessed as an asset by Centrelink and assuming she keeps the funds in the bank account, deemed income will count under the income test.

This may affect her age pension. Furthermore, if she then gifted this amount to your daughters, Centrelink will treat the amount gifted, less the first $10,000, as a ‘deprived’ asset, and count it under the means tests for 5 years. This is a complex issue and expert advice is essential.

I know you’re a strong advocate of insurance bonds and their benefits. I’m a self-funded retiree, over 60, drawing down from my account-based pension. As you would know, I’m not required to submit a tax return to the ATO. Given the 30 per cent tax paid by the insurance bond company (reducing distributions to bond investors), do you still recommend them over all other investments for grandchildren?

You’re in a unique position as you don’t receive any age pension and pay no tax. Given that, a separate bank account in your name seems like a sensible choice.

Most grandparents face a different challenge – they receive some age pension, and if the money is in their name, their pension is reduced as the balance grows. Another key issue is that only insurance bonds are protected from estate challenges.

If you think your estate could be contested, keeping the money in your name would be a risky move.

We have just $400 remaining on our loan and have kept it that way to retain access to a $40,000 redraw facility, which is useful for quick funds if needed. However, we’re paying an $8 monthly fee plus interest at 8.8 per cent. While minimal, we’re wondering if it’s better to pay it off completely. What happens to the title once the mortgage is cleared? Do we need a copy, or is it just held at the Titles Office?

Paying off the final $400 on your mortgage will close your access to the $40,000 redraw facility. While the $8 monthly fee and 8.8 per cent interest on the small balance are minor, the ability to access $40,000 instantly could be valuable in an emergency.

If you close the loan, you will need to rely on other sources of liquidity, such as an offset account, a line of credit, or readily available investments. If those alternatives aren’t in place, the redraw facility may be worth keeping.

Once the mortgage is repaid, the lender will discharge it and notify the Titles Office. You may need to complete a Mortgage Discharge Form and pay a small fee. The property title will then be registered solely in your name, usually in digital form, though you can request a copy for your records.

If keeping the redraw facility offers peace of mind, leaving the mortgage as is may be sensible. However, if you have other funds available and want to eliminate fees and interest, paying it off will simplify things.

I am 67 and retired from my banking career after 48 years. I now do handyman work to stay active, which I enjoy. It’s not full-time – about 10 hours per week. I also spend 10 hours weekly at a paid woodworking course. I’m self-employed but not incorporated or registered (no ABN/ACN). I issue invoices for all my jobs.

I’ve tried seeking clarification from the ATO and my super fund unsuccessfully. If I’m self-employed, what evidence must I provide to the ATO/super fund to contribute to super and claim a tax deduction for concessional contributions? I wish to contribute the $30,000 maximum.

An ATO spokesperson says the work test requires proof of gainful employment for at least 40 hours within 30 consecutive days, as an employee or self-employed, in the financial year of contribution.

Australia’s tax system relies on self-assessment, assuming your information is accurate. If reviewed, and you lack evidence for a deduction, your claim may be disallowed. Keep records of your work hours to demonstrate compliance.

You seem on the right track. Getting an ABN might be wise – it’s free.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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