Q: My wife will turn 60 next year and it has always been my intention to cash out her portion of our small self managed super fund (SMSF) and re-contribute it straight back in so as to ensure that when she and I pass away, our children are not hit by tax. Is that still a valid strategy and if so, am I correct in thinking that I only have one year in which to do it as the maximum bring forward amount will be reduced from the current $450,000 to some other number from 1 July, 2012?
Trish’s response: For the benefit of other readers, I will first explain the potential tax bill that you are referring to in your question.
Tax-free component is… tax-free
Background: Super benefits can be made up of two components: tax-free component and taxable component. The tax-free component is always tax-free irrespective of the age that you take your super benefits, and irrespective of whether you leave your benefits to individuals who are treated as dependants or non-dependants under the tax laws.
The taxable component of a benefit may be subject to tax depending on whether you take your benefit before or after the age of 60, or, in the event of your death, when you leave your benefits to a ‘non-dependant’ under the tax laws.
If a person dies, and leaves super benefits to an individual who is treated as a non-dependant under the tax laws, such as an adult child, then tax is usually payable on the taxable component of any death benefit. I explain the ins and outs of this ‘death tax’ and the meaning of
A strategy to minimise this ‘death’ tax when leaving super benefits to adult children is to boost the tax-free component of a benefit by making non-concessional (after-tax) contributions immediately before starting a pension, which then boosts the tax-free component of the account balance.
You have two questions, and I will answer the most straightforward question first. The bring forward cap of $450,000 for non-concessional contributions remains in place (for the 2011/2012 year, and now for the 2012/2013 and 2013/2014 years), and the Federal Government currently has no plans to reduce this limit (or increase the limit, at least until 1 July 2014. I explain how the $450,000 cap (available to under-65s) works in the article Your 2011/2012 guide to non-concessional (after-tax) contributions.
In relation to changes to contribution caps, you may be thinking of the changes to the concessional (before-tax) contribution caps, but they took effect from July 2009 (see article Super concessional contributions: 2011/2012 survival guide).
Boosting the tax-free component
Your second question is: Can I still use the re-contribution strategy to boost my tax-free component?
Generally yes, assuming the individual has satisfied a condition of release that permits them to access super benefits, such as retiring, or reaching the age of 65, or starting a transition-to-retirement pension (TRIP) or turning 60 and ceasing an employment arrangement. (I explain the conditions of release in the article Accessing super early:12 legal reasons to cash your super.)
You need to satisfy a few other conditions when withdrawing cash that you then intend to re-contribute, which means anyone considering such a strategy should always check the procedure with their adviser, or SMSF provider, or find a super expert or, in your case, an SMSF expert, for one-off advice.
Chasing a refund for a lifetime of contributions tax
Note: Another strategy generating a lot of interest with SMSF trustees worried about leaving a tax bill for their adult children, involves the anti-detriment provisions. An anti-detriment payment (now known as the ‘tax saving amount’) can deliver a refund of all contributions tax paid by the deceased member over the life of the benefit. The anti-detriment payment strategy is available when a death benefit is paid as a lump sum to a dependant. In this instance, the term ‘dependant’ relates to those individuals treated as ‘dependants under the super laws’ (which also includes adult children).
A SMSF needs to have fund members still in accumulation phase upon the death of the member to take advantage of the tax deduction that the SMSF receives for making the anti-detriment payment, and also have reserves to pay out the refund of
Depending on the specific circumstances, an adviser may recommend that a SMSF use a combination of the two strategies, or only one of the strategies depending on whether the recipients of the death benefit will be paying a ‘death’ tax. Alternatively, a SMSF adviser may decide the cost and effort of using such strategies may not justify the tax benefits.
Image by Frank Kehren
very useful information