The thought of leaving (when you cross the Jordan) loved ones with a substantial tax bill is something many may not consider. Fortunately, this can be circumvented with the right strategy. Exploring SMSF withdrawal and re-contribution strategies could enhance benefits for your beneficiaries and safeguard against potential legislative changes. However, it's crucial to seek personalized advice before executing any strategy.
What's Changed?
The withdrawal and re-contribution strategy has been a favorite for managing tax outcomes in retirement and estate planning. But with reforms, it's time to reassess its benefits:
Non-Concessional Contribution (NCC) Cap: Now $120,000 annually, or $360,000 using the 3-year bring-forward rule.
Total Super Balance (TSB) Cap: Indexed to $1.9 million to determine NCC eligibility.
Transfer Balance Cap (TBC): Indexed between $1.6 million and $1.7 million for existing and new pensions.
Abolition of Anti-Detriment Payment: A collective sigh of relief from professionals!
From July 1, 2022, SMSF members over 67 can continue making NCCs up to age 75, maximizing the re-contribution strategy's benefits.
The Basic Re-Contribution Strategy
This strategy involves withdrawing an amount from an SMSF member’s balance and making a non-concessional contribution (NCC) back into the SMSF, either in the same or another member’s name. This converts any taxable component of the lump sum withdrawn into a tax-free component, meaning no tax on death benefits.
To use this strategy, the SMSF member must meet a full condition of release to make lump sum withdrawals. If you're under 75, you don't need to meet the work test eligibility to make NCCs, but you must ensure your TSB contribution cap allows for re-contribution.
We recommend using this strategy after meeting a condition of release post-60 and before 75. For those 60 or over, any withdrawal is tax-free and not included in assessable income.
For members aged between preservation age and 59, withdrawals from the tax-free component are tax-free, while any taxable component within the low rate cap (LRC), currently $235,000 for 2023/24 [1], is taxed at 0%. Amounts above the LRC are taxed at 15% plus Medicare Levy. These tax concessions are crucial to the strategy's overall benefit.
Benefits of the Re-Contribution Strategy
Tax-Effective Retirement Income: For those under 60, it increases the tax-free component of superannuation pension payments.
Reduced Tax for Beneficiaries: Non-tax dependent beneficiaries (usually financially independent adult children) pay less tax on death benefit lump sums.
Legislative Protection: NCCs are after-tax contributions, offering some protection against future changes to pension taxation.
Case Study: David's Strategy
Meet David, a 60-year-old widower with $660,000 in his SMSF account, split 50:50 between taxable and tax-free components. He has two adult children, Laura and Matthew, who are not financial dependents. If David passed away today, $330,000 of his super benefit would be taxed at 15% plus Medicare Levy, as his children are not tax dependents.
By using the re-contribution strategy, David could save up to $56,100 in taxes ($330,000 x 17%). Additionally, if David starts an account-based pension, a concessional contribution strategy could help reduce his taxable income until he reaches 67, and afterward to 75 if he meets the work test yearly.
Maximum Total Super Balance for Additional Contributions
A person cannot make NCCs if their total super balance (across all super funds) on the prior June 30 is equal to or greater than $1.9 million. If the balance is less than $1.9 million but more than $1.66 million, they can contribute some NCCs but cannot fully utilize the 3-year bring-forward of $360,000.
Here's a quick breakdown:
Less than $1.66 million: 3 years ($360,000)
$1.66 million to < $1.77 million: 2 years ($240,000)
$1.77 million to < $1.9 million: 1 year ($120,000, no bring-forward available)
$1.9 million and above: Nil
Re-contributions, where one member of a couple makes a withdrawal and contributes it into their spouse’s account, can help maintain a balance of less than $1.9 million, preserving future NCC eligibility.
$1.6 – $1.7 Million Pension Transfer Balance Cap
From July 1, 2021, the transfer balance cap rose to $1.7 million (indexed), but it varies between $1.6 million and $1.7 million for those with existing pensions. This cap limits the maximum amount transferable into the retirement phase of superannuation. Any excess must remain in accumulation or use a re-contribution strategy to transfer funds into a spouse’s account, allowing the couple to hold more wealth in tax-effective superannuation pensions.
Traps and Interaction with Centrelink Strategies
When considering a re-contribution strategy, it's essential to evaluate each member’s personal circumstances and the broader implications.
Government Benefits and Payments: Withdrawing money from the taxable component before age 60 increases taxable income, even though no tax is payable on amounts up to the LRC ($235,000 for 2023/24) [1]. This could impact entitlements based on assessable or taxable income, such as Government Co-contributions, spouse contribution tax offsets, low-income tax offset, Medicare levy, and Family Tax Benefit.
Moving Funds to a Spouse Under Age Pension Age: A popular strategy involves an older spouse cashing out some super and contributing it to their younger spouse’s SMSF account. This can help the older spouse qualify for more Age Pension, as super in the accumulation phase is not means-tested when held in the name of a person under Age Pension age. It can also enable taxable money to be converted into tax-free money and may result in a Government co-contribution or spouse tax offset.
I hope this guidance has been helpful! Please take a moment to comment and share your feedback. If you found this useful, reblog, like on Facebook, and help us spread the word. For personalized advice, feel free to contact us. Our offices are located in Melbourne and the Gold Coast, and we can also meet via Teams. Looking forward to helping you explore your options!
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