Recontribution strategy case study: How superannuation tax components impact estate planning

Need to know: This article has been prepared using the contribution caps that apply in the current (2023-24) financial year.

Due to indexation, the concessional cap will increase to $30,000 per year and the non-concessional cap will increase to $120,000 per year from 1 July 2024.

The increase to the non-concessional cap also affects the bring forward rule.

The table below shows how your Total Superannuation Balance (TSB) will affect the bring forward period available to you in 2024-25 if you trigger the rule that year. If you are already in an active bring forward period, the caps that applied in the first year continue to apply until your bring forward period ends.

Total super balance on 30 June of previous year	Maximum total contribution during bring forward period	Bring-forward period
Less than $1.66m	$360,000	3 years
$1.66m to less than $1.78m	$240,000	2 years
$1.78m to less than $1.9m	$120,000	No bring-forward period. General non-concessional cap applies.
$1.9m or more	Nil	N/A

Yes, it 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.

Need to know: You need to be eligible to implement the recontribution strategy. Also, it is useful for more than estate planning purposes.

Read our article Super recontribution strategy: How it works 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 components: Generally consist 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 deductible contributions. Investment earnings on both non-concessional and concessional contributions 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 commence 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 superannuation accounts once they commence 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 to them.

Their super accounts at age 65 are as follows:

Member	Tax-free component with % of total super balance	Taxable component with % of total super balance	Total Super 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 (as per the estimates of Moneysmart Account-based Pension Calculator):

Member	Tax-free component with % of total super balance	Taxable component with % of total super balance	Total Super 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).

For more information on tax payable on super death benefits, read article A simple guide to what tax is payable on super death benefits.

Estate planning outcome with a recontribution strategy:

Paul and Fiona use a two-stage strategy to reduce the taxable component of their super.

Stage 1: At age 65, Paul and Fiona withdraw $110,000 each and recontribute back into super as a non-concessional contribution. This would change their tax components as follows:

Member	Tax-free component with % of total super balance	Taxable component with % of total super balance	Total Super Balance
Paul	$280,300 (37%)	$469,700 (63%)	$750,000
Fiona	$188,000 (38%)	$312,000 (62%)	$500,000
Total	$468,300 (37.50%)	$781,700 (62.50%)	$1,250,000

As you can see above, the full $110,000 withdrawal doesn’t come out of the taxable component. This is how the withdrawal works:

Under the proportioning rule, if 30% of your super account is a taxable component and 70% is a tax-free component, if you withdraw a lump sum amount, it must also have a 30% taxable component and a 70% tax-free component.
As they are over age 60, they are not liable to pay tax on the taxable component. [They would be liable for tax on a withdrawal they were in an unfunded (untaxed) superannuation scheme].

Stage 2: At age 66, Paul and Fiona use the bring-forward rule and withdraw $330,000 each and recontribute back into super as a non-concessional contribution

At age 66, their super balances would be as follows (for simplicity, assume no change in overall super balance, ignore any market fluctuations, costs, etc.):

Member	Tax-free Component with % of total super balance	Taxable Component with % of total super balance	Total Super Balance
Paul	$488,200 (65%)	$261,800 (35%)	$750,000
Fiona	$392,600 (79%)	$107,400 (21%)	$500,000
Total	$880,800 (70.50%)	$369,200 (29.50%)	$1,250,000

As before, assume 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 with % of total super balance	Taxable component with % of total super balance	Total Super Balance
Paul’s reversionary pension account	$87,408 (65%)	$47,066 (35%)	$134,474
Fiona	$70,376 (79%)	$18,707 (21%)	$89,083
Total	$157,784 (70.50%)	$65,773 (29.50%)	$223,557

Estate planning impact:

As mentioned earlier, Fiona has made a binding nomination with her super fund leaving her death benefit from super to her adult son James.
James would receive a total of $223,557 of death benefit.
However, now the taxable component is a much lesser amount of $65,773. Therefore, James would pay a tax of $11,181 ($65,773 x 17% including Medicare) and the net death benefit would be $212,376 ($223,557 – $11,181). This is higher than the previous scenario by $17,622. In other words, James receives an additional $17,622 from his mother’s super.

As you can see from the above example, planning ahead can mean more of your super death benefit ends up in the hands of your non-dependant beneficiary.

Find out how a dual pension strategy can work hand-in-hand with recontributions.

Note: Before you put a recontribution strategy into action, you should consider seeking financial advice. It’s a complex area with potentially large sums of money at stake.

Also check out SuperGuide article Super recontribution strategy: How it works which lists ten points to consider before using a recontribution strategy.