Yes, taking money out of super only to put it back in using a recontribution strategy sounds pointless, but there’s method to the madness, especially where estate planning is concerned.
How does moving super help with estate planning? This involves understanding the impact of the tax components of super and their treatment when a death benefit is paid.
You will also need to be eligible to implement the recontribution strategy and stay within your personal contribution caps.
Read more about the super recontribution strategy to understand how it works, check your eligibility and things to consider.
Tax components
For the purposes of estate planning and this case study, understanding the tax components within super is crucial.
- Tax-free component: Generally consists of contributions to super on which you have already paid tax, such as non-concessional (after-tax) contributions. No tax is payable upon the withdrawal of this component.
- Taxable components: Generally consist of concessional (before-tax) contributions to super such as employer Super Guarantee (SG) contributions, salary sacrifice or personal contributions you claim a tax deduction for. Investment earnings on your total balance are also added to the taxable component.
Case study
Paul and Fiona are married and both 65 years old. They plan on retiring within a few months and will start account-based pensions from their super accounts to draw down an income stream to support their living expenses.
Outside of super, they don’t have any other significant investment assets. They will nominate each other as reversionary pension beneficiaries of their respective super accounts once they start the account-based pensions.
While they are both alive, generally the taxable and tax-free components will not be relevant to their income stream as those pension payments will be tax free.
Their super accounts at age 65 are as follows:
| Member | Tax-free component | Taxable component | Total balance |
|---|---|---|---|
| Paul | $200,000 (27%) | $550,000 (73%) | $750,000 |
| Fiona | $100,000 (20%) | $400,000 (80%) | $500,000 |
| Total | $300,000 (24%) | $950,000 (76%) | $1,250,000 |
Estate planning outcome without a recontribution strategy:
- Assume that Paul passes away at age 84 and his pension reverts to Fiona. Fiona then passes away at age 85 with the following super balances (using estimates from the Moneysmart Account-based Pension Calculator):
| Member | Tax-free component | Taxable component | Total balance |
|---|---|---|---|
| Paul’s reversionary pension account | $36,308 (27%) | $98,166 (73%) | $134,474 |
| Fiona | $17,817 (20%) | $71,266 (80%) | $89,083 |
| Total | $54,125 (24%) | $169,432 (76%) | $223,557 |
Estate planning impact:
- Fiona has made a binding death benefit nomination leaving her super death benefits to her adult son James.
- James would receive a total of $223,557 of death benefit.
- However, out of that total, $169,432 is taxable. Therefore, James would end up paying tax of $28,803 on the taxable component ($169,432 x 17% including Medicare) and the net death benefit would be $194,754 ($223,557 – $28,803). If the benefit was first paid into Fiona’s estate before being paid to James, the Medicare Levy would be avoided, and the taxable amount would not be added to James’ income for the purposes of calculating other entitlements and liabilities.
Read more about what tax is payable on super death benefits.
Estate planning outcome with a recontribution strategy:
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