Join Master Your Money | Online Wealth Coach

Ask an Adviser: Superannuation Recontribution Strategy

I’m 61 years old still working full time but thinking of the future when I retire in the next 4 years or so.
As you know super is made up of concessional and non concessional components. I want to convert all my super to non concessional so there will be no tax payable to my adult children when I’m gone.
How do I “Re Contribute” to do this. I think i can’t do this when I retire but can only withdraw 10% while working if I change my super to transition pension phase.
Any suggestions Please. Malcolm

 

Dear Malcolm,
Thank you for your enquiry and for such an excellent question. Congratulations on the consideration to retire over the next few years.
You bring up a great topic with regards to using the governments superannuation rules to ensure the maximum amount of your wealth is gifted upon passing rather than being taxed. This is known as the ‘Recontribution Strategy’, to understand how this strategy works let us first consider the Superannuation legislation you mentioned.

The two ways money can be put into super is tax free (a non-concessional contribution – NCC) or a taxable (concessional contribution- CC).
Every dollar that enters and leaves the superannuation environment is normally remembered by the fund as these components.
For example, over our working life employers put our super contributions in concessionally, if we were to put money in ourselves, we could elect to put this in non-concessionally. As the majority of people rely on employer contributions to fund their retirement savings, over time there can generally be a higher percentage of the concessional and therefore taxed component of one’s retirement balance.

As you are aware, upon death these taxable and tax-free components of our money is remembered, leaving this final tax calculation to potentially be paid by those who receive our gifting. The rules of Estate Planning come into effect here and have different outcomes for either a ‘tax dependant’ and a ‘non tax dependant’.

Tax dependant beneficiaries include:
– the deceased’s spouse or former spouse, − the deceased’s child aged under 18,
– any other person who was financially dependent on the deceased just before he or she died,
– any other person with whom the deceased was in an interdependency relationship just before he or she died, and − any person who receives a super lump sum because of the death of another person where the deceased died in the line of duty.
Therefore, any person other than those considered tax dependants who receives a death benefit is generally a non-tax dependant. Common examples include adult financially independent children, siblings, nieces and nephews, grandchildren and charitable organisations.

Considering both the superannuation tax component with what type of tax dependant the inheritance will be gifted to gives rise to the following tax being paid or not:

The taxable component of a lump sum superannuation death benefit paid is taxed at a maximum rate of 17% when paid to a non-tax dependant (or 15% where paid via the estate as no Medicare levy is payable).
Conversely, the tax-free component is received completely tax free by any beneficiary, even if they are non-tax dependants.

The recontribution strategy involves withdrawing an amount from individual’s superannuation benefits and recontributing these monies as a non-concessional contribution (NCC). The result of this strategy is that taxable superannuation benefits are converted into tax free superannuation benefits.
Therefore, converting taxable component into tax-free component before death reduces the amount of tax payable where a death benefit is paid to non-tax dependant beneficiaries, such as adult children whom you are considering.

To answer your question How to ‘re-contribute’:

Step 1: Withdrawing money from superannuation
The first step of the re-contribution strategy is withdrawing the relevant amount from super. To access super as a lump sum, the person either requires unrestricted non-preserved benefits (UNPBs) or has preserved benefits and has met a condition of release.

Commonly, the relevant condition of release will be retirement, so as in your case it may be best to do this upon retirement – depending on the balance that you are needing to re-contribute.

Step 2: Re-contributing the proceeds to super
Once the funds have been withdrawn, they are subsequently re-contributed. As such, the person must: i. be eligible to contribute into super, and ii. have sufficient room available on their NCC cap to make the contribution.
(Generally, a larger balance needing to be withdrawn and recontributed should be completed in the financial year of retirement taking advantage of the below ‘bring forward rules’. A smaller ‘relevant amount’ could potentially be recontributed using the 10% transition to retirement strategy you mentioned).

As you have found, additional rules apply which need to be carefully planned out. An example would be to consider:
The Non-concessional Contribution (NCC) ‘cap’

When undertaking a re-contribution strategy, a person’s NCC cap must be considered.

Broadly speaking, NCCs are limited by the NCC cap of $110,000 pa, or if eligible for the bring-forward provisions, up to $330,000 over 3 years. Before making an NCC, it is important to check:
− Your contribution history to ensure that the bring-forward provisions have not already been triggered in the previous two financial years;
− Your total superannuation balance (TSB) on 30 June the previous financial year:
o If TSB is more than $1.7 million, no NCCs can be made;
o If TSB between $1.4 million and $1.699 million, the full 3-year bring forward will not be available.

To ensure all of the above is implemented smoothly to ensure your desired outcome, careful forethought and tax calculations need to be considered through complex legislation. Please ensure you research your personal circumstances in depth or seek advice with a qualified Financial Adviser.

Looking to reach and
exceed your money goals?

Master Your Money | Online Wealth Coach is your step-by-step guide to insider financial planning secrets in a 12-module online format, covering every money-topic for all financial circumstances.

 

Provided in an easy to digest and hands-on format, the platform was built with you in mind so that you feel empowered to reach your financial goals, at your own pace in the comfort of your home!

Inclusions:

  • Unlimited Wealth Coach Access
  • Downloadable Wealth Bundle with Worksheets and Resources
  • Access to Supportive Facebook Group