Superannuation and living in aged care β what you need to know
For those who are entering aged care, there is certainly plenty to consider such as finding a suitable residence, how to pay the fees, the physical move and the inevitable emotional strain on all involved.
There are additional financial challenges for those with a reasonable amount of superannuation such as tax, social security and estate planning that may need to be addressed and understood.
I explore three key implications of having superannuation and living in an aged care home.
1: Superannuation death benefits tax
When a person with Superannuation (including SMSFs) dies, there is a possibility that a death tax may be payable and dependent on whether the beneficiary is a tax dependant and the tax components.
A tax-dependant versus a non tax-dependant
A tax dependant can be a spouse or former spouse, child under 18 or another person who was in an interdependent relationship with the deceased.
For these people, the good news is, there is no tax to be paid on the benefit.
For everybody else, which is often adult children, there are taxes between 17% & 30% depending on the components.
- A common question asked is, if you are in a situation where you have no tax-dependants, should you pre-emptively withdraw your superannuation during your lifetime?
Itβs a tough question as the timing of death is akin to picking the lotto numbers. The impact on any Age pension needs considering as well.
Taking this one step further there is the concept a withdrawal from a superannuation fund could be timed so that it is paid to the client before their death. This payment is tax-free if it is paid from a taxed fund and the client is aged 60 or over.
An area I suggest requires specialised advice is the area of "death-bed' withdrawal. This is surrounded by uncertainty and needs either legal and/or financial advice. That is if a withdrawal from a super fund could be timed so that it is paid before dying, then the payment is tax-free if it is paid from a taxed fund and the client is aged 60 or over.
2: Interdependency relationship β living apart because one person is in aged care
For both superannuation death benefit nomination and tax purposes, an interdependency relationship exists if you and the other person:
- have a close personal relationship
- live together
- provide financial support to the other person
- provides domestic support and personal care to the other person.
Where a person meets this definition, it allows them to be nominated under a binding death benefit nomination as well as classed as a tax-dependant and therefore pay no tax on a superannuation death benefit.
3; Downsizer contributions
One of my favourite changes to the superannuation contribution legislation in 2018 was the Downsizer contributions.
Where a person living in aged care meets the criteria and sells their home and have surplus funds after paying their Refundable Accommodation Deposit, RAD(e.g: the downpayment on the aged care room) or even part RAD if appropriate, they can use a downsizer contributions to contribute up to $300,000 of the sale proceeds to superannuation if they are single or $600,000 if a couple.
To be eligible:
- You need to be 60 or over.
- The home must be in Australia, have been owned by you or your spouse for at least 10 years and the sale must be exempt or partially exempt from capital gains tax (CGT).
- You must not have previously made a downsizer contribution to your super from the sale of another home or from the part sale of your home.
- Before (or at the same time as) making your contribution you must provide your fund with the 'downsizer contributions into super form'.
There are of course alternatives to superannuation that may result in better age pension outcomes and lower means-tested care fees.
These are all very complex matters therefore essential you talk to your adviser to be clear if they are relevant to your circumstances.