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, 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. 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 2016/2017 year), although new rules come into place from 1 July 2017, which will affect the amount you can contribute to super as non-concessional (after-tax) contributions (for more information on the changes to the NCC cap, see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap).
Important: From 1 July 2017, Australians can transfer no more than $1.6 million into pension phase, subject to legislation, and this change will also have an impact on spouse’s hoping to leave their super benefits to a surviving spouse(see SuperGuide article Burden for retirees: Monitoring $1.6 million transfer balance cap ).
Tip! If you are not already a SuperGuide subscriber, it is worth becoming a subscriber to our free monthly newsletter, to keep updated on any changes, especially with the suite of changes affecting super from 1 July 2017. You can subscribe by entering your email address in the section on the right-hand side of this page, or click here
I explain how the $540,000 cap (available to under-65s) works in the SuperGuide articles Your 2017/2018 guide to non-concessional (after-tax) contributions and Bring-forward rule: 10 super facts you should know .
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 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 generating a lot of interest with SMSF trustees worried about leaving a tax bill for their adult children, involves the anti-detriment provisions. Note that the federal government is abolishing this opportunity from 1 July 2017, subject to legislation (see SuperGuide article Anti-detriment payments banned from July 2017).
Although anti-detriment payments will no longer be available from 1 July 2017 (subject to legislation), it is worth explaining what they are, for those family members dealing with such payments until 30 June 2017.
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 Estate planning: 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.
Note: Anti-detriment payments will no longer be available from 1 July 2017, subject to legislation.