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 may have missed out on the opportunity because the maximum bring-forward amount was reduced from $540,000 to $300,000 since 1 July, 2017?
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. We explain the ins and outs of this ‘death tax’ and the meaning of dependants and non-dependants in the SuperGuide articles Superannuation death benefits: Who receives super payments, and how much tax is paid? and Superannuation death benefits: Dear Dad, Tax for everything.
A potential 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 super pension, which then boosts the tax-free component of the account balance.
You have two questions, and we will answer the most straightforward question first.
The bring-forward cap of $540,000 for non-concessional contributions applied for the 2016/2017 year, and a lower cap has applied since 1 July 2017. For the 2017/2018 year, and for the 2018/2019 year. the annual non-concessional contributions cap is $100,000, and the bring-forward cap is $300,000 (for more information on the changes to the NCC cap, see SuperGuide article Non-concessional contributions: 10 facts about the $100,000 cap).
Important: Since 1 July 2017, Australians can transfer no more than $1.6 million into retirement phase, and this change will also have an impact on spouses hoping to leave their super benefits to a surviving spouse(see SuperGuide articles Retirement phase: A super guide to the $1.6 million transfer balance cap and Superannuation death benefits and the $1.6 million transfer balance cap).
We explain how the $300,000 bring-forward cap (available to under-65s) works in the SuperGuide articles Your 2018/2019 guide to non-concessional (after-tax) contributions and Bring-forward rule: A definitive super guide.
Boosting the tax-free component
Your second question is: Can an individual 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. (We explain the conditions of release in the SuperGuide 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 that used to generate a lot of interest with SMSF trustees worried about leaving a tax bill for their adult children, involved the now-defunct anti-detriment provisions. Note that the federal government abolished this opportunity from 1 July 2017, (see SuperGuide article Anti-detriment payments banned since July 2017).
Although anti-detriment payments are no longer be available, it is worth explaining what they are, for those family members currently dealing with such payments that fall under the pre-July 2017 rules.
An anti-detriment payment (known as the ‘tax saving amount’) delivers a refund of all contributions tax paid by the deceased member over the life of the benefit. The anti-detriment payment strategy was 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 financially independent adult children).
A SMSF needed 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 was essential. I also briefly explain the anti-detriment provisions in the SuperGuide article Estate planning: How can an SMSF live forever?
In the past, depending on the specific circumstances, an adviser may have recommended that a SMSF use a combination of the two strategies (re-contribution, anti-detriment), or only one of the strategies depending on whether the recipients of the death benefit would be paying a ‘death’ tax. Alternatively, a SMSF adviser may have decided the cost and effort of using such strategies may not have justified the tax benefits.
Note: Since 1 July 2017, anti-detriment payments are no longer available.