SUPER CHANGES

22 May 2017

COULD A “RECONTRIBUTION STRATEGY” BENEFIT YOU?

By Witi Suma

The third instalment in our Super Reforms series focuses on a strategy that has historically proven to be very popular amongst super fund members, and is expected to be even more useful as we approach the 30th June and indeed beyond, given some of the changes to super that have been legislated to take effect from July.

What is a recontribution strategy?

Put simply, this strategy involves withdrawing a portion of your superannuation benefit – as a lump sum or as a pension payment – and recontributing it back into super as a non-concessional contribution (NCC) for either yourself or another member, e.g. your spouse. From a tax perspective, if you are between preservation age and 59, you can access tax-free lump sums from your lifetime “Low Rate Cap” (which is currently $195,000), and if you are aged 60 and over, withdrawals are tax-free.

So what are some of the benefits of this strategy?

To minimise any “death benefits tax” payable by your beneficiaries:

Traditionally, one of the major reasons why individuals have utilised this strategy is for estate planning purposes. By withdrawing a portion of your benefit – which may consist of a taxable component – and recontributing it as an NCC which is tax-free, you can minimise or even eliminate the potential tax payable by beneficiaries (who are not recognised as being dependants under taxation law, e.g. adult children) after you pass away.

To keep the balance of your member benefit held in retirement phase under $1.6 million:

A new “transfer balance cap” applies from July which puts a limit of $1.6 million on how much you can have in the tax-free retirement phase, so this strategy would clearly benefit those couples where one member has a balance in retirement phase of close to, or already in excess of this limit, and their spouse’s balance is below. Making a withdrawal from the member’s account with the higher balance and contributing it into the other’s account potentially avoids excess transfer balance tax from being imposed.

A couple can potentially repeat this strategy for as long as they are eligible to, subject to the annual contribution limits and meeting certain other criteria (see further below).

To keep your “total super balance” (TSB) under $1.6 million to retain eligibility for certain opportunities:

Your TSB includes all benefits you hold in super and pension phase. Effective from July 2017, if your TSB as at the 30th June the previous financial year is greater than $1.6 million:

• You are precluded from contributing NCCs;
• If you have also exceeded your NCC cap in a financial year, you will be ineligible for the Government co-contribution;
• If your spouse’s TSB is greater than $1.6 million OR if they have exceeded their NCC cap in a given year, you will not be eligible for the tax offset for spouse contributions.

Keeping your TSB under $500,000 to take advantage of the “unused concessional contributions cap carry-forward”:

Effective from July 2018, if your TSB as at the 30th June the previous year is under $500,000, you will be able to carry forward, for up to five years, any unused portion of your concessional (i.e. employer or personal deductible) cap. It is therefore worthwhile for those with broken working patterns, e.g. taking maternity/paternity leave, to keep their member balance under $500,000 to take advantage of this.

Before you consider undertaking a recontribution strategy, check that you meet the eligibility criteria:

• To withdraw from super, you need to have met a condition of release, i.e. you have “unrestricted non-preserved” benefits.
• If you are withdrawing the funds as a pension payment from your Transition to Retirement pension, check that the withdrawal doesn’t exceed the maximum 10% limit for the year.
• Ensure the contribution going back into your super account or your spouse’s account falls within your respective annual NCC caps.
• If you are aged 65 or over,you must meet a “work test” to contribute to super whereby you’ve worked at least 40 hours in a consecutive 30 day period in the financial year the contribution is made. NCCs cannot be made once you turn 75.

Action required

If you believe a recontribution strategy may be of benefit to you, and you need our assistance to determine your member balance and/or your spouse’s, how much you’ve already contributed as NCC and to check that you meet all other eligibility criteria, please contact us.

Also, a reminder that should you wish to undertake this strategy, this is your last opportunity to make use of the higher NCC cap of $180,000 (or up to $540,000 using the “bring-forward” rule whereby you can deposit three years’ worth of NCCs in one year if you are under 65) before the annual cap is reduced from July.

Witi Suma
SMSF Administration Manager
SMSF Specialist Advisor™
BAS Agent No. 85929007
Authorised Representative No. 275149

If you have any questions or comments, please email me at witi@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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