Death, Taxes and Unintended Consequences

Inheritance taxes in these jurisdictions can be extremely expensive imposts on the deceased and the family members.

Often, in situations that are already emotionally straining for all involved at the best of times, having to deal with further financial stress around a series of governmental charges that can be difficult to understand is the last thing needed. Australia thankfully has not followed suit on this direct form of taxation which I think is a good thing.

Having said that we are seeing an indirect form of ‘inheritance taxes’ in Australia, through the rules around superannuation, when a member passes away.

Death benefit payouts from superannuation to a deceased member’s spouse are usually tax-free based on a ‘carve out’ for financial dependency.

No direct inheritance tax here.

However due to recent reforms to our superannuation system (transitional balance caps in particular), a form of indirect inheritance tax is arising in Australia due to the potential of a deceased member’s benefits (regardless of their reversionary pension status) being required to be paid out of a superannuation fund if certain strategies are not carefully implemented in respect to estate planning within the superannuation environment.

Again, no direct inheritance tax here.

Death benefit payouts from superannuation to a deceased member’s children who are under 60 years of age are not tax-free in most cases.

Also, even in the event the payout is to the spouse and financial dependency exists, having to remove a substantial asset base out of the superannuation environment (generally currently taxed at rates of 0 to 15%), under both scenario’s above will generally result in an increased income tax impost on the surviving spouse/family.

Is this an ‘unintended consequence’ or an indirect inheritance tax?