Q: My wife turns 60 this financial 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 $540,000 to some other number from 1 July, 2016?
A: 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 (after you die) 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, for example, a financially independent 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 dependants and non-dependants in the SuperGuide articles Estate planning: Beware the dastardly death tax and Estate planning: Dear Dad: Tax for everything.
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 $540,000 for non-concessional contributions remains in place (for the 2015/2016 year), and the federal government currently has no plans to reduce this limit, although the federal government is reviewing the Australian tax system. If the caps were to change, we would be publishing this information on SuperGuide. If not already, it is worth becoming a subscriber to our free monthly newsletter, to keep updated on any changes, especially with an election in 2016.
I explain how the $540,000 cap (available to under-65s) works in the article Your 2015/2016 guide to non-concessional (after-tax) contributions.
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: 14 legal ways to withdraw your super benefits.)
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 contributions tax. Clearly, this is a complex area of superannuation and tax law and qualified and independent advice is essential. I also briefly explain the anti-detriment provisions in the article How can a SMSF live forever?.
Depending on the specific circumstances, an adviser may recommend that a SMSF use a combination of the two strategies (recontribution, anti-detriment), 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.