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Speaker 1: Inheritance in Australia, the sneaky hidden taxes that you didn't

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Speaker 1: know about until right now. But even better, you know

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Speaker 1: how to minimize or potentially avoid them completely. Hello and

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Speaker 1: welcome back to another episode of Sugar Mama's Fireplay, the

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Speaker 1: podcast where weignite your financial independence, fuel those early retirement

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Speaker 1: calls and dreams, and help you build sustainable wealth. I

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Speaker 1: am your host financial planner, Canna Campbell, and today we're

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Speaker 1: diving into a topic that can surprise, frustrate, and even

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Speaker 1: shock a lot of Australian families.

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Speaker 2: That is inheritance tax.

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Speaker 1: Now you might be thinking, hang on a second, back

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Speaker 1: it up, Canna, there isn't actually any inheritance tax in Australia. Well,

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Speaker 1: technically you are spot on, so formal inheritance tax was

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Speaker 1: actually abolished back in I think nineteen seventy nine. But

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Speaker 1: here's a twist. There are still taxes that can quickly

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Speaker 1: and quietly eat into your inheritance or the inheritance you're

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Speaker 1: planning on passing on, particularly through superannuation, death benefits and

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Speaker 1: of course capital gains tax on inherited assets. And if

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Speaker 1: you haven't been sort of planning ahead and thinking proactively.

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Speaker 1: These taxes can actually cost you or your loved ones

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Speaker 1: tens of thousands of dollars, if not hundreds of thousands

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Speaker 1: of dollars. So instead of just focusing on the problem,

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Speaker 1: as you know, I'm a solutions type of person, let's

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Speaker 1: talk about exactly what these tax rules really mean in practice,

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Speaker 1: why this topic is really trending right now people that

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Speaker 1: are waking up to this and getting really quite concerned.

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Speaker 1: But more importantly, the legal smart strategies it can actually

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Speaker 1: help you keep more of your hard earned legacy within

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Speaker 1: your family or with your loved ones. So let's go

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Speaker 1: through this together right now. So do we have death

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Speaker 1: duties in Australia. The short answer is no, But when

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Speaker 1: superannuation passes to a non dependent like an adult child,

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Speaker 1: the taxable portion of that super is often hit with

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Speaker 1: a seventeen percent tax or technically fifteen percent plus the

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Speaker 1: two percent medicare levey depending on how it's paid. Now,

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Speaker 1: this is now getting the nickname in Australia as inheritance tax,

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Speaker 1: even though it's technically called superannuation death benefit tax. So

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Speaker 1: if you're planning on leaving your super to a spouse

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Speaker 1: or dependent children, you're fine, you do not need to

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Speaker 1: worry about this, there's no problem. But all because they

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Speaker 1: are going to receive it still tax free. But for

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Speaker 1: adult children or people that you're not financially dependent on

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Speaker 1: or they're not financially dependent upon you, the ATO are

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Speaker 1: going to take a slice of your legacy. So why

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Speaker 1: is this a bit of a fuss Because this rule

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Speaker 1: has actually been in place for many, many years and

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Speaker 1: no one's.

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Speaker 2: Really cared about it.

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Speaker 1: Okay, So the thing is, it's because it's attracted to superannuation,

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Speaker 1: and previously superinnuation wasn't really a big deal. It's not

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Speaker 1: where a lot of people's wealth really sat. Fast forward, today,

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Speaker 1: superannuation balances are so much larger thanks to compulsory contributions

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Speaker 1: and obviously increasing compulsory contributions, we're now sitting at twelve

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Speaker 1: percent SG. Also, property values and share portfolios have sought

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Speaker 1: and thank goodness, financial literacy is improving. People now know

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Speaker 1: what is sitting in their superannuation, what they're entitled to,

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Speaker 1: how to make it grow. Plus on top of this,

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Speaker 1: we also had some recent polity changes, like the proposed

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Speaker 1: thirty percent tax on unrel's capital gains tax above three

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Speaker 1: million dollars in Super and of course, so these things

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Speaker 1: in combination have put Super back in the headlines. Now

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Speaker 1: go and combine that with one of the biggest intergenerational

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Speaker 1: wealth transfers in Australian history, as the baby burnemers passed

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Speaker 1: down assets. You've got a perfect recipe for bigger tax

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Speaker 1: bills and bigger, nastier surprises.

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Speaker 2: So how does this sort of fit.

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Speaker 1: In yours and my real life. Well, say you've built

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Speaker 1: up eight hundred thousand dollars in your superannuation. When you

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Speaker 1: pass it goes to say your adult son or daughter.

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Speaker 1: If six hundred thousand dollars of that money within Super

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Speaker 1: is the taxable component, because you have taxable and non

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Speaker 1: taxable within Super, your child adult child could be facing

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Speaker 1: a tax bill of say up to one hundred and

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Speaker 1: two thousand dollars. That's money that have actually could have

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Speaker 1: gone to help pay your adult child's mortgage. Else about

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Speaker 1: your grandchildren, or just give them more financial breathing space.

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Speaker 1: But instead that one hundred thousand dollars call it goes.

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Speaker 2: To the ato. It's gone.

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Speaker 1: It's literally flushed down the toilet, when it actually could

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Speaker 1: be avoided or at least reduced significantly. So how do

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Speaker 1: we actually start reducing this tax bill or potential tax

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Speaker 1: bill in a legal manner that doesn't get anyone into trouble. Well,

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Speaker 1: there's actually quite a few different strategies which I'm really

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Speaker 1: glad to be sharing with you right now, so you

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Speaker 1: can start thinking about this, do some research, and obviously

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Speaker 1: you head to your financial planner's office armed with this

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Speaker 1: information and get something put in place sooner rather than later.

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Speaker 1: So all right, let's talk about the sort of key

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Speaker 1: ones here. The first idea is to look at leaving

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Speaker 1: SUPER to tax dependent so people who are financially dependent

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Speaker 1: upon you.

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Speaker 2: I'm talking just SUPER here.

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Speaker 1: So if you have say SUPER and say an investment

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Speaker 1: portfolio as well, you might want to consider leaving all

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Speaker 1: of the SUPER to your spouse or financially dependent children,

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Speaker 1: and then leave perhaps your investments outside of SUPER to

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Speaker 1: those adult.

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Speaker 2: Children to avoid this.

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Speaker 1: Now, what some people choose to do if that's the

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Speaker 1: case where they don't have, you know, they prefer they've

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Speaker 1: got a bit of a mix of assets. They might

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Speaker 1: have say more money and SUPER and less money investments

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Speaker 1: or even vice versa. You can put a clause in

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Speaker 1: your will to allow a bit of a rebalancing once

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Speaker 1: the money has been paid to the financially dependent spouse

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Speaker 1: and then the adult children are actually accounted for. But

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Speaker 1: what this does is it means the ATO can't go

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Speaker 1: and take a slice of that superannuation money through the

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Speaker 1: super death benefit tax because it's gone to a finance

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Speaker 1: dependent The remaining assets that are outside of super theto

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Speaker 1: have no say, of course, unless the asset is actually

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Speaker 1: then gone and sold. So that's a great strategy immediately.

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Speaker 1: Another idea is to direct your super to your estate.

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Speaker 1: Now this isn't the best strategy, but it definitely does

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Speaker 1: have some savings because if your superannuation is paid to

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Speaker 1: your estate rather than to adult children, the tax rate

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Speaker 1: at least drops from seventeen percent to fifteen percent because

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Speaker 1: trusts don't actually pay the Medicare levees, so you completely

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Speaker 1: avoid that, saving two percent. So it's better than nothing

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Speaker 1: at all, but it's good to know this as an

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Speaker 1: option for some people.

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Speaker 2: Now, once that money is in your state.

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Speaker 1: It can then be distributed however you wish, and obviously

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Speaker 1: your trustee will help organize that, and you can put

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Speaker 1: your your requests or preferences obviously in your will. An idea,

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Speaker 1: which I would say is the most popular idea and

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Speaker 1: I think the most effective idea is that is called

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Speaker 1: a washing out strategy. Now, this is where you can

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Speaker 1: withdraw some of your superannuation and then recontribute it back in.

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Speaker 1: It's definitely powerful, and it's probably a really overlooked strategy

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Speaker 1: because you actually start to change and reduce the amount

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Speaker 1: of taxable money that the ATO would be going after

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Speaker 1: and shifting it and moving it and almost recycling it

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Speaker 1: back into non taxable money. So it's almost like a

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Speaker 1: kind of similar to a debt recycling strategy where you're

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Speaker 1: you know, I guess, and that's why it's cool. I

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Speaker 1: call it, you know, so washing out strategy. So I'm

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Speaker 1: going to because it's the most powerful one.

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Speaker 2: I actually want to talk you.

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Speaker 1: Through an exercise right now, because this is I think

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Speaker 1: the most handy one to know about. So say you're

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Speaker 1: over age sixty, you've finished up work, and you've got

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Speaker 1: say six hundred thousand dollars in super and eighty per

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Speaker 1: cent of that is taxable, So four hundred and eighty

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Speaker 1: thousand dollars and then the remaining twenty percent is the

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Speaker 1: tax free component. The ATO won't ever be able to

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Speaker 1: go after you could if you wanted to withdraw, say

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Speaker 1: two hundred thousand dollars as a lump sum, and because

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Speaker 1: you're over age sixty under current legislation of the time

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Speaker 1: of this podcast, it's tax free to you personally. You

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Speaker 1: would then go and recontribution it back into your superannuation,

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Speaker 1: but this time as a non concessionable, non concessional after

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Speaker 1: tax contribution. So it literally two hundred thousand dollars comes

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Speaker 1: out tax three and then you put it back in

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Speaker 1: this time as a non concessual contribution, which is an

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Speaker 1: after tax contribution. So now you've got a completely different balance.

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Speaker 1: You've actually got three hundred and twenty thousand dollars now

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Speaker 1: as a tax free component, whereas previously you had four

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Speaker 1: hundred and eighty thousand dollars as a taxable component. This

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Speaker 1: is significant because you've basically made two hundred thousand dollars

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Speaker 1: were taken it away from the ato coming after it,

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Speaker 1: so you've washed out two hundred thousand dollars of the

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Speaker 1: tax component, which means your adult children inherit there's two

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Speaker 1: hundred thousand dollars and will be you know, less exposed

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Speaker 1: to that. You know seventeen percent death benefit tax and

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Speaker 1: in fact, if you wanted to, depending on you know,

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Speaker 1: your situation.

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Speaker 2: Of course you get advice around this.

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Speaker 1: But you potentially could pull out a lot more than

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Speaker 1: that if you want and try and make as much

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Speaker 1: of that as possible now tax free through this washing

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Speaker 1: out withdrawal and rec contribution strategy now is a little

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Speaker 1: bit different, and this is why it's so important that

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Speaker 1: you get advice because it's going to the advice comes

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Speaker 1: with pros and cons. It's complex and there are lots

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Speaker 1: of consequences. But even in this example alone, of you know,

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Speaker 1: withdrawing two hundred and putting it back in, the potential

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Speaker 1: savings is up to thirty four thousand dollars. So you

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Speaker 1: can see why I think this is a really powerful

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Speaker 1: strategy and really seriously needs to be considered under the

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Speaker 1: guidance of professional advice. However, I should also point out

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Speaker 1: it's a little bit different if you're under age sixty

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Speaker 1: because you have access to your super you know, depending

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Speaker 1: on whether you've met the conditions to release. But the

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Speaker 1: withdrawal that two hundred thousand dollars could be partially taxable,

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Speaker 1: So it's essential that you get advice before making these actions.

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Speaker 1: But when you understand what the potential tax would be

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Speaker 1: incurred by withdrawing it, and then look at okay, well,

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Speaker 1: yes it might cost me, say eight thousand dollars in tax,

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Speaker 1: but I'm going to be saving my children eighty thousand

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Speaker 1: dollars of the tax, you know, in five years time

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Speaker 1: or ten years time, it actually may be worth while

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Speaker 1: doing this, which is why I stress the importance of advice.

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Speaker 1: But obviously for age people over age sixty, it's a

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Speaker 1: lot more straightforward and it's even more effective as an

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Speaker 1: estate planning tool. Now another strategy is again I think

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Speaker 1: this is one that people are doing without considering you know,

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Speaker 1: the washing stone, and it's where they're i think, almost

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Speaker 1: having a bit of an irrational reaction and they're pulling

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Speaker 1: you know, as they learn about inheritance tax in the

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Speaker 1: effect of it, they're just panicking and just pulling all

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Speaker 1: of their money outside of SUPER in its entirety. And

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Speaker 1: then they're taking that money, they keep putting it in

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Speaker 1: cash savings or they're going and investing it outside of SUPER.

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Speaker 1: So technically they are avoiding the death benefit tax altogether.

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Speaker 1: But what I am worried about this is it has

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Speaker 1: its risks. You are, first of all, you are losing

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Speaker 1: out on all of those tax concessions, particularly if you're

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Speaker 1: of age sixty and you're drawing you know, a tax

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Speaker 1: reallocated pension income every single year. I mean your tax

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Speaker 1: rate drops to zero percent with money and SUPER the

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Speaker 1: other risk And I was actually reading about a situation

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Speaker 1: like this the Only yesterday where someone withdrew all their

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Speaker 1: money out of SUPER because they thought they were sick.

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Speaker 2: And dying and they thought it's fine, I'll pull it

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Speaker 2: all out of SUPER.

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Speaker 1: But they're actually out their money. So because they pulled

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Speaker 1: it out of a concessionally taxed environment, that money didn't

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Speaker 1: last as long. All those tax savings which we have

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Speaker 1: given them, that additional longevity was no longer there, and

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Speaker 1: they actually ate into all of their money that they

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Speaker 1: pulled out of SUPER before their death, and it meant

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Speaker 1: that they had to go on the age pension, which

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Speaker 1: we all know is absolutely a miserable existence for so

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Speaker 1: many people.

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Speaker 2: So there are a lot of concerns to be you know, with.

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Speaker 1: This, and it's not a black and white world. You

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Speaker 1: can actually look at doing a mixture of these different

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Speaker 1: things where perhaps you do do you know a withdrawal

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Speaker 1: recontribution strategy, but you also maybe look at keeping some

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Speaker 1: money out of superannuation depending on how much you've got,

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Speaker 1: particularly if you're approaching that three million dollar threshold if

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Speaker 1: that proposal comes through, so you can really sort of

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Speaker 1: have the best of both worlds. And I guess keep

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Speaker 1: your fingers in a lot of different pies and sort

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Speaker 1: of carve yourself depending on how laws and taxes and

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Speaker 1: rules and loopholes and contribution. It's you know, change over time.

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Speaker 1: Another idea, and again this is probably more of one

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Speaker 1: for someone who's got I guess, greater financial freedom and

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Speaker 1: independence than others. But if you're age sixty and retired

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Speaker 1: and you want to start pulling money out of super,

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Speaker 1: some people are actually fighting they just want to go

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Speaker 1: and spend it, or they actually want to start giving

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Speaker 1: it to their family members. So they are you know,

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Speaker 1: avoiding that tax withdrawing it tax free if they're over

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Speaker 1: age sixty and they're actually giving their children an early inheritance. Now,

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Speaker 1: this is something I've seen more and more of where

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Speaker 1: people are starting to think, you know what, I'm watching

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Speaker 1: our children and our grandchildren struggling financially struggling to get

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Speaker 1: a foot, you know, on the property ladder, or struggling

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Speaker 1: with student debt or the rising cost of living, and

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Speaker 1: they instead of waiting for them to pass over to

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Speaker 1: be able to give them money, they want to actually

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Speaker 1: see their grandchildren and their adult children actually enjoy their

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Speaker 1: inheritance a little bit earlier. And there are ways of

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Speaker 1: doing this in a very clever way. And that's like using,

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Speaker 1: for example, of family trust, and you know, you can

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Speaker 1: have a bit more control as to how that money

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Speaker 1: is distributed, you know, whether it be a love sum,

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Speaker 1: or whether it's paid to them over a period of time,

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Speaker 1: or whether it's potentially money that's invested on their behalf,

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Speaker 1: and you create an investment portfolio that pays them a

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Speaker 1: passive income stream. But this is definitely another strategy that

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Speaker 1: is really worth considering for so many people who are

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Speaker 1: worried about this inheritance tax and just simply don't want

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Speaker 1: their money taken away from them by the ATO. So

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Speaker 1: the fine print, you really got to look into the

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Speaker 1: fine print. And again, you know, this is why we

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Speaker 1: need to be aware, we need to think proactively, we

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Speaker 1: need to plan ahead. These strategies always come with rules,

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Speaker 1: They come with benefits. They come with the downsize. They

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Speaker 1: also come with caps as to how much money you

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Speaker 1: can put back into super and how much you can

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Speaker 1: take out and the potential tax that's triggered if you're

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Speaker 1: under age sixty, and you also need to understand that

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Speaker 1: obviously there are consequences and it is complicated. So that

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Speaker 1: is why you've got to go and get professional advice.

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Speaker 1: And that is a non negotiable, absolute essential. So at

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Speaker 1: the end of the day, you know you or your

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Speaker 1: loved ones have worked incredibly hard to build your wealth

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Speaker 1: or their wealth. This is the last thing you want

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Speaker 1: is for the ATO to come and take.

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Speaker 2: A chunk simply because no.

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Speaker 1: One warned you or you couldn't be bothered to do

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Speaker 1: something about this little known inheritance tax. Even though it's

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Speaker 1: not inheritance tax, let's be honest, it's a form of

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Speaker 1: an inheritance tax. But it is one that is actually

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Speaker 1: avoidable to a certain degree. And by you now understanding

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Speaker 1: the rules and having the right conversations today, now that

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Speaker 1: you know a few different strategies to effectively reduce and

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Speaker 1: avoid it, you can go and get that professional advice.

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Speaker 1: You can actually ensure that your legacy stays exactly where

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Speaker 1: you want it to, or your loved one's legacy stays

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Speaker 1: exactly where they want it, and it's in the hands

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Speaker 1: of the people that you really love and you want

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Speaker 1: that money to actually help benefit them, or vice versa.

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Speaker 1: So if you know somebody who's planning to leave wealth

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Speaker 1: through their super or someone who may inherit some money

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Speaker 1: through someone's super, can you please make sure that you

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Speaker 1: send them this episode. You could actually be saving them tens,

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Speaker 1: if not hundreds of thousands of dollars because you're giving

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Speaker 1: them the knowledge. You're giving them the time and the

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Speaker 1: opportunity to do something about it before this tax is

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Speaker 1: actually triggered and there's no going back. You can't go

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Speaker 1: back and retrospectively fix it. It's done. You have to

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Speaker 1: just cop that tax. So you can actually stop this

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Speaker 1: from happening by sending them this episode and telling them,

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Speaker 1: please make sure you listen to it. The money the

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Speaker 1: savings is most definitely worth your time now. In the meantime,

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Speaker 1: thank you everyone for listening to this episode on Sugar

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Speaker 1: Mama's Fireplay. It is always an absolute honor to be

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Speaker 1: able to connect with you every single Monday morning and

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Speaker 1: be a part of you. Starting your week off on

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Speaker 1: an empowered, informed note, and remember your money is here

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Speaker 1: to serve you, never to stress you out. Keep it

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Speaker 1: in your family, keep it with your loved ones, and

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Speaker 1: keep your money working for you and of course, as always,

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Speaker 1: keep that financial fire burning bright within. This is Sugar

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Speaker 1: Mama's fireplay.