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Using a re-contribution strategy with your super sounds complex and mysterious, but in reality the name says it all – you withdraw some of the savings in your super account and then you re-contribute 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 most things to do with super, it’s all about the tax benefits you – and your spouse and dependents – could gain from using this type of strategy.
Always seek professional advice from an independent tax or financial adviser before implementing a re-contribution strategy, as it involves complex tax calculations and eligibility rules. You also need to be very careful not to exceed the relevant super contributions caps.
You should also confirm with your adviser that you are eligible to contribute the money back into the super system before making a withdrawal.
The information in this article is of a general nature only and cannot be considered financial advice.
Understanding your super benefits
Before explaining how a re-contribution strategy works, it’s important to know that the money in your super account is classed as either:
1. Tax-free components
The tax-free component (or exempt component) of your super account is generally the contributions made into your super fund on which you have already paid tax, so you will not pay tax on them again when they are withdrawn. Tax-free components include your non-concessional (after-tax) contributions and the associated investment earnings.
The tax-free component is always paid to you without a 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 component of your super account is 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 your take it before or after age 60, or whether you leave your benefits to someone who the tax laws consider a ‘dependent’ or a ‘non-dependent’.
Important note: For a re-contribution strategy to be worthwhile, a large part of your super benefits need to be taxable components, as the aim of the strategy is to reduce the taxable component and increase the tax-free component.
If only a small part of your super benefit is taxable components, it may not be worthwhile considering a re-contribution strategy.
There are rules about withdrawing money from your super account. When you make a lump sum withdrawal, 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.
Watch your tax rate
If you are between your preservation age and age 60, you can withdraw from the taxable component of your super account without paying tax up to the annual ‘low?rate cap’.
This amount ($205,000 in 2018/2019) is a lifetime cap and is the maximum amount of the taxable component you can withdraw from your super benefit without paying tax.
How a re-contribution strategy works
Implementing a re-contribution strategy simply involves withdrawing a lump sum from your super account and then re-contributing the money back into your super account as a tax-free non-concessional (after-tax) contribution. When you withdraw this again at a later date, you do not need to pay tax on it, as it is after-tax money.
There are a number of areas where a re-contribution strategy can be useful:
1. Estate planning
On your death, when the taxable component of your super account is paid to someone considered a ‘non-tax dependent’ under the tax laws (such as an adult child), they may have to pay up to 30% (plus Medicare levy) in tax. Spouses and dependents aged under 18 do not have to pay tax on their payment.
Using a re-contribution strategy to reduce the taxable component of your super benefit can significantly reduce the tax payable by your non-tax dependent beneficiaries.
2. Tax planning
If you are aged under 60 and start using the money in your super account to pay an income stream when you retire, the taxable component of the income stream will be taxed at your marginal tax rate minus a 15% tax offset. The tax-free portion is paid to you tax-free. Using a re-contribution strategy to convert your taxable component into a tax-free component could reduce your tax bill.
3. Utilising both spouses’ Transfer Balance Caps
By re-contributing some of your super benefit into your spouse’s super account, you can both hold up to $1.6 million in retirement phase super accounts. This means as a couple you can have up to $3.2 million invested in tax-free income streams. Using a re-contribution strategy you can use each partner’s Transfer Balance Cap, with two account balances available to reduce the tax-free component and tax payable to non-tax dependents.
4. Access government super contributions
Making a re-contribution payment into your spouse’s super account may mean you are eligible for a spouse contribution tax offset, while your spouse may be eligible for the government’s co-contribution payment.
Sounds great. Am I eligible to use a re-contribution strategy?
To implement a re-contribution strategy with your super benefits, you need to be eligible to withdraw a lump sum from your super account and you also need to be able to re?contribute 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 if you are aged 65 to 74
10 things to consider when it comes to re-contribution strategies
If all this still sounds like a good idea, it’s important to bear in mind the following points before embarking on a re-contribution strategy:
- Any financial strategy solely designed to reduce your tax bill could be viewed as tax avoidance by the ATO.
- 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.
- Re-contributions into your – or your spouse’s – super account are subject to the normal contribution rules and caps. For more information, see SuperGuide article Beginner’s guide to making super contributions.
- Once you hit age 65, you will need to satisfy the work test to make a contribution into your super account.
- Making a withdrawal and re-contribution into your super account could affect both your Total Super Balance (TSB) and Transfer Balance Cap. Your TSB needs to be under $1.6 million on 30 June of the previous financial year to be eligible to make any non-concessional contributions in the following financial year. For more information, see SuperGuide article What is included in my Total Superannuation Balance, and when does it apply?.
- You may have to pay transaction costs – such as a buy/sell spread or capital gains tax – on any investments your super fund has to sell to pay for your withdrawal and re-contribution. For more information, see SuperGuide article Buy/sell spread costs: why these charges may shrink your super.
- If you exceed your non-concessional (after-tax) contribution cap ($100,000 in 2018/2019 or $300,000 using a bring-forward arrangement) when making a re?contribution, you may have to pay additional tax. For more information, see SuperGuide article What to do if you exceed your super contributions caps.
- You will need to pay professional advice fees to implement this type of strategy, as they require complex calculations to work out the tax impact and most effective amount to withdraw and re-contribute.
- If you have previously triggered a bring-forward arrangement or have made large non-concessional (before-tax) contributions in the current financial year, you may not be able to re-contribute the money back into your super account without exceeding your non-concessional contributions cap. For more information, see SuperGuide article A super guide to understanding the bring-forward rule.