Q&A: How can you reduce inheritance tax if you leave your super to your children?

Please don’t do that, I’m just saying that’s the easiest way of doing it. But if you do that, of course, you’re going to be paying tax at your marginal rates versus the super funds, 0% rate (in pension phase) or 15% rate (in accumulation phase). The real way, or the most common way that we reduce inheritance tax is by utilising a strategy called the recontribution strategy. There is an article and case study about this on SuperGuide’s website. So, what is the recontribution strategy?

For example, Garth withdraws money from his super fund. When I make that withdrawal, it’s got to come from both my taxable and tax-free component. If I’m over 60, I don’t pay any tax on it. It’s tax free to me. I then take an amount of that money and I re-contribute it back to super as a non-concessional contribution.

So, that non concessional contribution forms part of the tax-free component, which means my kids don’t pay any tax because it’s the tax-free component. Your children only pay tax on the taxable component of your super. And it’s at a 15% rate plus Medicare. So, it could be around 17 % of the taxable component. So, to get around that, we withdraw money, tax-free if over 60, and we re-contribute that money back into super as non-concessional. So, it increases the tax-free part of what’s left to our kids.

That’s the recontribution strategy. Of course, all of this needs to be done well in advance of our departure from this world. We need a plan for these things well in advance. But essentially, the recontribution strategy is the one that would most often be used.