A recontribution strategy is a tax-effective way for individuals to manage their superannuation, reduce potential tax liabilities for beneficiaries, and optimise estate planning outcomes. By withdrawing taxable components from super and recontributing them as non-concessional contributions (NCCs), this strategy converts taxable amounts into tax-free components, reducing tax for non-dependent beneficiaries.
What is a Recontribution Strategy?
A recontribution strategy involves withdrawing an amount from a superannuation account and recontributing it as an NCC. This process transforms the taxable portion of super into a tax-free component, making it a beneficial estate planning tool.
Key Benefits of a Recontribution Strategy
- Estate Planning Advantages: Tax-free components are received tax-free by all beneficiaries, whereas taxable components can attract up to 17% tax if paid to non-tax dependants.
- Tax-Effective Income Streams: Individuals between preservation age and 60 can reduce taxable income on superannuation pension payments.
- Optimisation for Super Balance Transfers: Helps manage contribution caps and tax-free balances for couples planning for retirement.
How Does the Recontribution Strategy Work?
The process typically involves two key steps:
- Withdraw funds from superannuation:
- The individual must have unrestricted non-preserved benefits or meet a condition of release.
- Withdrawals consist of taxable and tax-free components in proportion to the account balance.
- Recontribute as a non-concessional contribution:
- The withdrawn amount is recontributed to super as an NCC.
- The new contribution forms part of the tax-free component, reducing future tax liabilities.
Who Can Benefit from This Strategy?
This strategy is particularly beneficial for individuals who:
- Have superannuation benefits with a large taxable component.
- Want to minimise tax paid by non-dependent beneficiaries.
- Have the ability to make NCCs within the relevant caps.
- Have reached preservation age and plan to draw an account-based pension.
Key Considerations and Limitations
Before implementing a recontribution strategy, individuals must consider:
- Non-Concessional Contribution Caps: The standard cap is $110,000 per year, or up to $330,000 under the bring-forward rule.
- Total Superannuation Balance (TSB) Restrictions: Individuals with a TSB of $1.9 million or more cannot make NCCs.
- Age Limitations: Contributions can be made up to age 75 (subject to specific conditions).
- Tax on Withdrawals: Individuals under age 60 may be taxed on the taxable component of withdrawals, affecting the strategy’s effectiveness.
Example: Brian’s Recontribution Strategy
Scenario
Brian, 59, has a super balance of $600,000 consisting of $550,000 taxable and $50,000 tax-free components. He plans to leave his super to his two independent adult children, who would otherwise pay tax on the taxable component.
Strategy
- Brian withdraws $256,354, ensuring the taxable component does not exceed his low-rate cap of $235,000.
- He recontributes the withdrawn funds as an NCC, converting them into tax-free amounts.
Outcome
After the recontribution, Brian’s superannuation balance is 47.5% tax-free, reducing potential tax on his children’s inheritance. If he were to pass away, his beneficiaries would save $39,950 in tax.
Enhancing the Strategy
- Using Separate Super Accounts: Recontributed funds can be placed in a new account to preserve the tax-free component.
- Ongoing Recontributions: If future NCC caps allow, additional recontributions can further reduce taxable components.
- Couple Strategy: Spouses can share recontributions to balance superannuation holdings and optimise future income streams.
Final Thoughts
A recontribution strategy is an effective way to reduce superannuation death benefit tax and create a more tax-efficient retirement income stream. However, it requires careful planning around contribution caps, withdrawal tax implications, and estate planning objectives. Seeking professional financial advice is recommended to ensure the strategy is applied effectively and aligns with broader financial goals.