Boost Your Tax Position with Superannuation Recontribution
Ever considered withdrawing and then redepositing into your super? This recontribution strategy might seem odd, but it’s a powerful tool for tax optimisation and estate planning.
Your super consists of both tax-free and taxable portions. The tax-free part generally consists of contributions on which you have already paid tax, such as your non-concessional contributions.
When this component is withdrawn or paid to an eligible beneficiary, there is no tax payable.
The taxable component generally consists of your concessional contributions, such as any salary sacrifice contributions or the Super Guarantee contributions your employers have made on your behalf.
You may need to pay tax on your taxable contributions depending on your age when you withdraw it, or if you leave it to a beneficiary who the tax laws consider is a non-tax dependant.
Understanding the Recontribution Process
The main reason for implementing a recontribution strategy is to reduce the taxable component of your super and increase the tax-free component.
Essentially, it’s about optimising the tax benefits of your super. To do this, you withdraw a lump sum from your super account and pay any required tax on the withdrawal.
You then recontribute the money back into your account as a non- concessional contribution. If you withdraw this money from your account at a later date, you don’t pay any tax on it as your contribution was made from after-tax money.
The recontribution doesn’t necessarily have to be into your own super account. It can be contributed into your spouse’s super account, provided they meet the contribution rules.
To use a recontribution strategy you must be eligible to both withdraw a lump sum and recontribute the money into your account. In most cases this means you must be aged 59 to 74 and retired or have met a condition of release under the super rules.
Any recontribution into your account is still subject to the current contribution rules, your Total Super Balance and the annual contribution caps.
Advantages for Non-Tax Dependants
Recontributing your money into your super account may have valuable benefits when your super death benefit is paid to your beneficiaries.
A recontribution strategy is particularly important if the beneficiaries you have nominated to receive your death benefit are considered non-dependants for tax purposes. (The definition of a dependant is different for super and tax purposes.)
Recontribution strategies can be very helpful for estate planning, particularly if you intend to leave part of your super death benefit to someone who the tax law considers a non-tax dependant, such as an adult child.
It’s a forward-thinking approach, ensuring your loved ones get the most from your super. Otherwise, when the taxable component is paid to them, they will pay a significant amount of the death benefit in tax. (Your spouse or any dependants aged under 18 are not required to pay tax on the payment.)
Some non-tax dependants face a tax rate of 32 per cent (including the Medicare levy) on a super death benefit, so a strategy to reduce the amount liable for this tax rate can be worthwhile.
By implementing a recontribution strategy to reduce the taxable component of your super benefit, you may be able to decrease – or even eliminate – the tax your non-tax dependant beneficiaries are required to pay.
Navigating Super Contribution and Withdrawal Guidelines
Our retirement system has lots of complex tax and super rules governing how much you can put into super and when and how much you can withdraw.
It’s crucial to be well-informed and stay updated with these regulations.
Before you start a recontribution strategy, you need to check you will meet the eligibility rules both to withdraw the money and contribute it back into your super account.
Ensure you speak to us before acting, as we can help determine if you are eligible and calculate whether this type of strategy is a worthwhile addition to your estate planning.
For a deeper dive into recontribution benefits for your non-dependants, reach out to our team today.
Tax rates when super death benefit paid as a lump sum
1 Includes Medicare levy of 2%. If benefit is paid to estate, the executor pays the tax and no Medicare levy is payable.
Case study
Anish is aged 64 and divorced. He has an account-based pension (ABP) balance of $120,000 that only has a taxable component.
On his death at age 66, the balance of his ABP is $140,000. This is to be paid as a lump sum super death benefit to his adult son, who is not financially dependent on Anish.
Under the tax rules, as his son is considered a non-tax dependant, Anish’s super death benefit will be taxed $23,800 ($140,000 x 17% = $23,800).
This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.