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Using a recontribution strategy with your super savings sounds complex and mysterious. But in reality, the name says it all – you withdraw some of the savings from your super account and then recontribute them back into the super system.
Which raises an obvious question. Why take money out of super and then put it straight back in again?
Like many things to do with super, it’s all about the tax benefits you – and your spouse and dependants – could gain from using this strategy.
How a recontribution strategy works
Implementing a recontribution strategy simply involves withdrawing a lump sum from your super account, paying any necessary tax on the withdrawal and then recontributing the money back into your super account as a tax-free non-concessional contribution. When you withdraw this again at a later date, you do not need to pay tax on it, as your contribution was from after-tax money.
Understanding your super benefits
When trying to get your head around how a recontribution strategy works, it’s important to realise that the money in your super account is classified into two separate components:
1. Tax-free components
The tax-free component (or exempt component) of your super account is generally the contributions on which you have already paid tax, so you don’t pay tax on them again when they are withdrawn.
Tax-free components mainly include your non-concessional (after-tax) contributions.
The tax-free component is always paid to you without an additional tax bill, regardless of your age when you take your super benefit, or who you leave your benefits to if you die.
2. Taxable components
The taxable components are generally the concessional contributions (such as SG and salary sacrifice contributions) held in your super account.
They are calculated as follows:
Total super account balance – Non-concessional contributions
= Taxable component
You may have to pay tax on the taxable component of your super account depending on whether you withdraw it before or after age 60, and whether you leave your benefits to someone who the tax laws consider a dependant or a non-dependant.
Withdrawing from your super account
Before using a recontribution strategy, you also need to check the rules about how you can withdraw money from your super account.
Whenever you make a lump sum withdrawal from your super, you must withdraw it in the same proportions as the tax-free and taxable components in your super account.
For example, if your super account has an 80% taxable component and 20% tax-free component, your withdrawal amount will consist of 80% taxable component and 20% tax-free component. Withdrawals cannot be made from only one component of your super account.
Know the tax rates when making a withdrawal
The tax-free component of your super benefit is always paid to you tax free, provided you have reached your preservation age.
The tax treatment on your taxable component depends on your age (between your preservation age and age 59, or age 60 and over).
Tax rate applying at different ages
|Between your preservation age and age 59||Age 60 or over|
|Taxable (taxed component)|
up to low-rate cap ($225,000 in 2021–22)
|Taxable (taxed component) |
over low-rate cap ($225,000 in 2021–22)
|17% (including Medicare levy)||0%|
The amount you withdraw from your taxable component up to the annual low-rate cap ($225,000 in 2021–22) is tax free, but amounts above the cap are taxed at 17% (including the Medicare levy) or your marginal tax rate, whichever is lower.
The low-rate cap is a lifetime limit – which means it’s the total amount you can take over your lifetime, even if you make several withdrawals – and it’s indexed annually.
When can a recontribution strategy help?
There are a several situations where a recontribution strategy can be valuable:
1. Estate planning
On your death, when the taxable component of your super account is paid to someone considered a non-tax dependant under the tax laws (such as an adult child), they may have to pay a significant part of the benefit in tax. (Spouses and dependants aged under 18 do not have to pay tax on a payment.)
Using a recontribution strategy to reduce the taxable component of your super benefit can cut – or even eliminate – the tax payable by your non-tax dependant beneficiaries, so your beneficiaries receive a larger benefit. For some non-tax dependants, the tax rate payable when they receive a super death benefit can be up to 32% including the Medicare levy.
2. Tax planning
If you are aged under 60 and take a lump sum when you retire, the taxable component will be taxed at your marginal tax rate or 17%, whichever is lower. The tax-free portion is paid to you free of tax. Using a recontribution strategy to convert your taxable component into a tax-free component could reduce your tax bill.
3. Utilising both spouses’ transfer balance caps
When you retire and start withdrawing your super benefits, there is a limit to how much you can transfer from your accumulation account into a retirement phase pension account. This is called the Transfer Balance Cap and is currently set at $1.7 million (in 2021–22).
If you have more than $1.7 million (in 2021–22) in super, by recontributing some of your super benefit into your spouse’s super account, you may both be able to hold up to $1.7 million in retirement phase super accounts. This means as a couple you can have up to $3.4 million (in 2021–22) invested in tax-free income streams. (From 1 July 2017 to 30 June 2021, the general transfer balance cap was $1.6 million.)
Using a recontribution strategy can allow you to use each partner’s transfer balance cap, with two account balances available to reduce the tax-free component and tax payable to non-tax dependants.
4. Access government super contributions
Making a non-concessional recontribution into your spouse’s super account may mean you are eligible for a spouse contribution tax offset (up to $540 a year), while your spouse may be eligible for the government’s co-contribution payment.
Am I eligible to use a recontribution strategy?
To implement a recontribution strategy with your existing super benefits, you need to be eligible to withdraw a lump sum from your super account and you also need to be able to recontribute the money back into the super system. This usually means you are:
- Aged 55 to 74 so you are eligible to both withdraw from your super account and still make contributions
- Retired or have met a condition of release to access your super
- Able to still make contributions into super, so you need to meet the requirements of the work test or work test exemption if you are aged 67 to 74.
10 points to consider before using a recontribution strategy
If a recontribution strategy sounds like it could help you achieve your retirement or estate planning goals, there are some important points to bear in mind before taking the leap:
- Any financial strategy solely designed to reduce your tax bill could be viewed as tax avoidance by the ATO and could result in heavy penalties.
- Your taxable income – and tax bill – could increase in the financial year when you make the withdrawal from your super. It could also reduce any tax offsets or family assistance you receive during that financial year.
- If you are aged under 60, you may need to pay some tax on the lump sum you withdraw from your super account.
- Any recontributions you make into your – or your spouse’s – super account are subject to the normal contribution rules and caps. Learn more about making superannuation contributions.
- Once you turn 67, you need to satisfy the work test or work test exemption to make a contribution into your super account (other than a downsizer contribution).
- Withdrawing a lump sum and recontributing money into your super account could affect both your total super balance (TSB) and transfer balance cap. Your TSB needs to be under $1.7 million (in 2021–22) on 30 June of the previous financial year to be eligible to make non-concessional contributions in the following financial year.
- You may have to pay transaction costs – such as a buy/sell spread or capital gains tax (CGT) – on any investments your super fund must sell to pay for your withdrawal and recontribution.
- If you exceed your personal annual non-concessional (after-tax) contribution cap when making a recontribution, you may have to pay additional tax.
- You will need to pay professional advice fees to implement this type of strategy, as it requires complex calculations to work out the tax impact and most effective amount to withdraw and recontribute into your super account.
- If you have previously triggered a bring-forward arrangement or have made large non-concessional contributions in the current financial year, you may not be able to recontribute the money back into your super account without exceeding your personal non-concessional contributions cap.