Q&A: Can we use a recontribution strategy at 70 if we have a large transfer balance?

A recontribution strategy is really a tax planning strategy and an estate planning strategy. The way it works is it involves you withdrawing a lump sum, that is withdrawing money from your super account, where you then pay any necessary tax on that withdrawal, and then you take that money and you recontribute it back into your super fund as a tax free, non concessional contribution.

So if you are making withdrawal from your super, remember, if you’re over age 60, that lump sum that you take out is tax free. You don’t actually pay tax on it. But when you make that withdrawal, it comes from all of your taxed components – your taxable component and your tax free component. Now, the fact that you’re over 60 means you don’t actually pay tax on it personally. But if you were to pass away, any amount of your benefit that is classified as taxable component is actually taxed as high as 17% for your adult children.

So, to try and get rid of any tax payable by non-dependents, which is the main strategy we’re looking at here, we take a lump sum out, we don’t pay tax on it personally, we put it back in as non-concessional, and therefore it forms part of our tax free component. If those benefits are later paid to non-dependents, the adult kids, they get all of that tax free component, tax free. They don’t pay tax on it. So really, it’s a strategy to reduce tax payable by non-dependents, and usually by our adult children. So that’s the strategy. I hope that makes sense, that explanation around the strategy.

What we need to think about, though, and what we need to think about in particular to Graham’s question, are the rules around then putting the money back in? The rules around making contributions. Now what we’re looking at is making the contribution back in, the recontribution of those amounts. Now, if we look at the facts which have been given to us, if you are turning age 75, the recontributed amount must be received by your super fund no later than 28 days after the end of the month in which you turn 75.

So I’m just giving you the age restriction here for making non concessional contributions. There are no work test requirements. So, remember between age 67 to 74 work test is only for concessional contributions. We’re looking at non concessional contributions here because it’s part of the recontribution strategy. So therefore, the relevant age is 75. So we need to do this before turning 75. And in fact, it must be paid into your fund as a contribution no later than 28 days after you turn 75. Just gives you an extra 28 days to get the money back in.

But you’ve also got a restriction around your total super balance. So in order to have a non concessional contributions cap, so in order to be able to make a non concessional contribution and not have excess, you have to have a total super balance of under $1.7 million in the current year. So you need to look at your balance at 30th of June the previous year, and for the current year, the limit is $1.7 million. If you have a total super balance above that, which I believe you do, you would not be eligible to have a non concessional cap. Anything you put back in, any non concessional contribution you put in, would be deemed to be an excess contribution, and you essentially wouldn’t do that in this circumstance.

So, if you’re unable to make a non concessional contribution based on your age, or if you’re unable to use the non concessional contribution cap because of your total super balance, then this is not a strategy for you. So it’s not something that you would be able to entertain, because you’re not allowed to then put that money back in.

So again, two articles for you to have a look at, both from late last year. One is around the Super recontribution strategy and how it works. And the other one is around How to understand your total super balance. Have a look at those two if you need any more information on that.