Written

For

The

Australian

-

The

trap

for

couples

hidden

within

the

new

super

tax

on

balances

over

$3m

Here's a scenario that should make every retired couple with a decent super balance sit up and pay attention: your spouse dies, and suddenly you're hit with thousands of dollars in new taxes each year — despite doing nothing wrong.

Australia doesn't have a formal inheritance tax like the UK's 40 per cent hit on estates above £325,000. But the drip-feed of superannuation changes is quietly building something that looks awfully similar — a quasi-inheritance tax system. And the proposed Division 296 legislation, which adds an extra 15 per cent tax on earnings and unrealised gains above $3m in super, is the latest layer.

Here's the trap. Super caps are per person. There's no extra allowance when your spouse dies. Take a couple with a $3.5m property held equally in their SMSF. While both are alive, each has $1.75m — sitting comfortably below the $1.9m transfer balance cap. Rental income is tax-free. Life is good.

But when one dies, the surviving spouse inherits a $3.5m super balance. Suddenly they need to commute $1.6m back to accumulation phase (taxed at 15 per cent), face potential CGT if they sell the property, and cop the new Div 296 tax on the portion above $3m — including on unrealised gains. This is a particular nightmare for farming families, where the land is the super.

And it doesn't stop there. When the surviving spouse eventually passes, adult children who aren't financial dependants pay 17 per cent tax on the taxable component of super. The classic fix — the recontribution strategy — is getting harder as contribution caps shrink. The after-tax cap was $150,000 back in 2008. It's now $120,000. Indexed to CPI, it should be around $221,000.

My take? Estate planning around super is no longer optional if you've built a meaningful balance. Family trusts, timing of withdrawals, reversionary pension decisions — these need to be on the table well before anyone gets sick.