Superannuation – Should you consider a re-contribution strategy?

The Budget is only around the corner, and changes to superannuation are at the forefront of the rumour mill. Most Self-Managed Superannuation Fund clients are worried about what to do or if any hasty decisions should be made before the big Budget night in May.

What are your main concerns?

As always, any taxpayer should continue to act on the basis that the current law will remain the current law, so now is the time to make the most of the benefits and tax concessions currently allowed in the super arena.

You may want to consider a re-contribution strategy.

What is it? A re-contribution strategy is a withdrawal of super benefits with an aim to re-contribute the monies back into super. Doing so could guarantee:

  • Tax savings for you
  • Tax savings for your beneficiaries when you die
  • Possible access to increased Centrelink benefits

How does it work?

A member’s super account balance is split between tax-free and taxable components. Any benefit payments from super must be made in accordance with the proportioning rule which means that the tax-free and taxable component of the benefit must be calculated upon release. If a pension account is created, the proportioning rule also states that the tax-free and taxable components of the account are locked and cannot be changed. Upon withdrawal, no tax is payable on the tax-free component of a benefit.

With the re-contribution strategy, you withdraw your benefit and re-contribute all or a portion of it back into super as a non-concessional contribution. As a result, this will increase the tax-free component of your super balance, and when the benefits are paid out upon your death, your beneficiaries will pay less tax.

Why implement a re-contribution strategy?

The budget could potentially bring in new rules that will limit this strategy or render it useless. So, it may be a good idea to make the most of this strategy while it is still possible.

The re-contribution strategy converts the taxable portion of your super benefits into TAX-FREE components. This will result in a reduction of potential tax payable when your super is passed onto your beneficiaries following your death.

This strategy can only be used if you are:

  • able to meet a condition of release to access your super benefits or able to start a transition-to-retirement income stream upon reaching your preservation age, and
  • eligible to make personal contributions back into super.

Re-contribution can be effective from the following standpoints:

Estate planning perspective: If there is some likelihood that your super benefits will be inherited by those not considered ‘dependants’ (such as adult children), these beneficiaries will not be required to pay any tax at all on the tax-free portion of the benefit. So, the higher the tax-free portion, the better.

Social security and balancing perspective: If you and your spouse are of different ages, you can withdraw a benefit from the older spouse’s account and contribute these monies into the younger spouse’s account. Doing so can even out super account balances, increase tax-free portions and possibly increase the Centrelink age pension for a few years.

The re-contribution may be perfect for you if:

  • You are between the ages of 55 and 75 years old
  • You have met a ‘condition of release’ to access your super or are able to start a transition-to-retirement pension upon reaching your preservation age
  • You have the ability to re-contribute (a work test applies if you are over 65)
  • You have a taxable component as part of your member balance
  • You want your beneficiaries to pay as little tax as possible on any death benefits paid in the future

Pre-budget superannuation checklist: 

There are also some other practical things you could consider before the budget to minimise risk of adverse budget changes, including:

  • Maximise your concessional contributions and non-concessional contributions made this year
  • Trigger the three-year bring forward non-concessional contribution rule
  • Pay your minimum yearly income stream payments
  • Execute documentation for new pensions including any transition-to-retirement pensions

If you believe that you have paid enough tax in your life, and don’t think it is fair that your children should have to pay more tax when you pass on, then a re-contribution strategy may be for you.

Want to know what a re-contribution strategy could do for your business? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.