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A re-contribution strategy is just that; a withdrawal of your superannuation benefits and a re-contribution back into super.
Superannuation benefits are categorised into tax-free and taxable components depending on how the original contributions were made into the fund. In the current superannuation environment, lump sum withdrawals from superannuation must be made in accordance with the proportioning rules, that is, proportionate amounts drawn from taxable and tax-free components. There is no tax payable on tax-free components.
A recontribution strategy involves withdrawing a lump sum, paying any necessary tax on the withdrawal and re-contributing these funds into superannuation as a non-concessional contribution. The revised superannuation balance will potentially consist of all, or more, tax-free components.
A great reason to implement a re-contribution strategy is tax; this strategy converts the taxable portion of your superannuation benefits into tax-free components. Ultimately, this results in a reduction of the potential tax payable when your super is passed onto your beneficiaries following your death.
This strategy can only be implemented if you are able to meet a condition of release to access your superannuation benefits and also be eligible to make a contribution back into superannuation. The strategy is effective under the following circumstances:
Income tax perspective: A re-contribution is still beneficial for those aged between preservation age (from age 56) and age 60 and who are expecting to receive a superannuation income stream.
Estate planning perspective: This strategy can also be utilised where there is some likelihood that your superannuation benefits will be inherited by those not considered to be dependants under taxation law, such as adult children. A re-contribution can reduce the lump sum tax payable from death benefit proceeds, or in some cases, the adult beneficiaries will not be required to pay any tax at all (see table of tax rates on page 2).
The following table illustrates the tax rates applicable when superannuation death benefits are paid as a lump sum.
| Recipient | Superannuation component | Tax treatment | Tax components | Tax implicationst | Tax-free component | Taxable component | |
|---|---|---|---|---|---|---|---|
| Tax dependent (eg a spouse, children under 18, someone financially dependent on the deceased person) |
Tax-free |
No tax payable | $195,000 tax-free component (50%) | Tax-free | Initial superannuation balance | $200,000 |
$200,000 |
| | Taxable (taxed and untaxed elements) | No tax payable | $195,000 taxable component (50%) | Tax-free up to $195,000 of taxable component (low-rate cap for 2015/16) | Withdrawal |
$195,000 |
$195,000 |
| No-tax dependant (eg children 18 and over) | Tax-free | No tax payable | $390,000 total super | Nil tax payable | Balance in fund | $5,000 | $5,000 |
| |
Taxable (taxed element) |
Up to 17%1 | | | Add re-contributed amount | $390,000 |
$0 |
| |
Taxable (untaxed element) |
Up to 32%1 |
| | Balance after re-contribution | $395,000 | $5,000 |
Careful planning and professional advice can take some of the emotional and financial stress out of transitioning a loved one into an aged care facility.
There are a number of critical elements that will need to be taken into consideration when planning for aged care and the following checklist highlights the important information which is required when the time comes.
John, 57, has $400,000 in his super fund with $200,000 tax-free and $200,000 taxable component. Assuming he is eligible to withdraw his superannuation balance, he could proportionally withdraw $390,000 from his superannuation as follows:
Assuming he is eligible to re-contribute the full $390,000 into super, his revised superannuation balance will consist of 98.7 per cent tax-free component, rather than the original 50 per cent, as follows:
Re-contribution may be more beneficial if you are aged between 60 and 65 as superannuation benefits are tax-free (regardless of the tax components). You can then make a non-concessional contribution up to $180,000 per annum (2015/16) or up to $540,000 averaged over a three year period whilst you are under age 65.
| Recipient | Superannuation component | Tax treatment | Tax components | Tax implicationst | Tax-free component | Taxable component | |
|---|---|---|---|---|---|---|---|
| Tax dependent (eg a spouse, children under 18, someone financially dependent on the deceased person) |
Tax-free |
No tax payable | $195,000 tax-free component (50%) | Tax-free | Initial superannuation balance | $200,000 |
$200,000 |
| | Taxable (taxed and untaxed elements) | No tax payable | $195,000 taxable component (50%) | Tax-free up to $195,000 of taxable component (low-rate cap for 2015/16) | Withdrawal |
$195,000 |
$195,000 |
| No-tax dependant (eg children 18 and over) | Tax-free | No tax payable | $390,000 total super | Nil tax payable | Balance in fund | $5,000 | $5,000 |
| |
Taxable (taxed element) |
Up to 17%1 | | | Add re-contributed amount | $390,000 |
$0 |
| |
Taxable (untaxed element) |
Up to 32%1 |
| | Balance after re-contribution | $395,000 | $5,000 |
Careful planning and professional advice can take some of the emotional and financial stress out of transitioning a loved one into an aged care facility.
There are a number of critical elements that will need to be taken into consideration when planning for aged care and the following checklist highlights the important information which is required when the time comes.
John, 57, has $400,000 in his super fund with $200,000 tax-free and $200,000 taxable component. Assuming he is eligible to withdraw his superannuation balance, he could proportionally withdraw $390,000 from his superannuation as follows:
Assuming he is eligible to re-contribute the full $390,000 into super, his revised superannuation balance will consist of 98.7 per cent tax-free component, rather than the original 50 per cent, as follows:
Re-contribution may be more beneficial if you are aged between 60 and 65 as superannuation benefits are tax-free (regardless of the tax components). You can then make a non-concessional contribution up to $180,000 per annum (2015/16) or up to $540,000 averaged over a three year period whilst you are under age 65.
Transaction costs such as buy/sell spreads may apply while transferring the funds.
By implementing this strategy, your assessable and taxable income may increase for a particular financial year. A higher assessable income and taxable income may lead you to pay more tax, reduce tax offsets, Medicare levy or reduce some Family Assistance from Centrelink.
You may be liable to pay tax for the withdrawal from superannuation if you are aged below 60 and depending on the components of your superannuation.
When re-contributing, any amount that is in excess of a specified limit, the non-concessional cap, will incur a penalty tax.
Any potential anti-detriment payments (refund of contributions tax paid during the accumulation phase) that a surviving beneficiary may be entitled to may be reduced or even lost, as the value of these payments are proportional to the amount of taxable component in the death benefit lump sum paid as a result of death.
DMFS Financial Advisers Pty Ltd, ABN 71 158 044 476, is a Corporate Authorised Representative of AUS Financial Advisers Pty Ltd (ABN 89 159 536 151 AFSL 534501).
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