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Super and estate planning

Recontribution strategy

Section: 14.13

A recontribution strategy seeks to increase the tax-free portion of a client's superannuation interest just prior to commencing a superannuation income stream. Subject to a client meeting a condition of release with nil cashing restrictions (eg permanent retirement after attaining preservation age), they withdraw a tax-free lump sum from their super interest. The lump sum is then redirected back into super as a non-concessional contribution, and an income stream is then commenced.

The purpose of a recontribution strategy is to replace the funds being withdrawn (which consist, partially or fully, of a taxable component) with a tax-free component. From an estate planning perspective a recontribution strategy can minimise the taxable component of any benefit paid on death. This could result in a significant tax saving where a client's superannuation death benefit will be paid to a non-dependant for tax purposes (eg an adult child).

Recontribution strategy vs anti detriment payment

Where a trustee uses the approved formula method to calculate an anti-detriment payment, the calculation is based on a multiple of the taxable component of their superannuation interest - approximately 17.65% of taxable component where a client has only post 30 June 1988 service. However, a recontribution strategy converts some or all of a client's taxable component to a tax-free component, meaning that any anti-detriment payment may be significantly reduced by implementing such a strategy.

Assuming a client's super fund pays an anti-detriment payment, at first glance, the decision of whether or not to undertake a recontribution strategy simply depends on the intended recipient of a client's death benefit.

  • Spouse, former spouse or minor child: any lump sum death benefits will be received by a spouse, former spouse (via estate) or minor child tax-free (regardless of components) so a recontribution strategy would not save any tax on their lump sum death benefit, while it would reduce their anti-detriment payment.
  • Adult child: normally a very close comparison. Adult children are generally subject to tax on any taxable component received as a lump sum death benefit (including the anti-detriment payment), so a recontribution strategy will reduce the tax payable. However, their anti-detriment payment would also be reduced.
  • Other beneficiaries not dependent on or interdependent with the deceased: These beneficiaries are generally subject to tax on any taxable component received as a lump sum death benefit, while no anti-detriment is payable. A recontribution strategy is therefore generally the best option.

However, as well as a simple comparison of the effect of a recontribution strategy on a lump sum death benefit, there are some other important considerations, including:

  • Where a spouse (or minor child) is likely to elect to receive their death benefit as an income stream, an anti-detriment payment will not be payable upon the client's death. In that case, it would be important to consider who would be likely to receive any lump sum death benefit in the event of the death of the spouse.
  • Where a client with an adult child beneficiary is considering a recontribution strategy, the contribution of other money held outside super may be a better use of the client's non-concessional contributions cap (instead of a recontribution which may provide only a marginal benefit from a net death benefit perspective).
  • A recontribution strategy can provide some comfort and certainty where a client's future beneficiaries are uncertain (for example they have a spouse who is in poor health).
  • Where a client has some pre-1 July 1988 service, the approved formula calculation of their anti-detriment payment will be lower than the usual 17.65% of their taxable component.
  • For SMSF members, there are practical difficulties associated with making anti-detriment payments within SMSFs

Last modified: Tuesday, May 2, 2017