Super and estate planning
A re-contribution 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 (e.g. 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The maximum tax-free lump sum that may be withdrawn is calculated using the superannuation lump sum taxation rates, appropriate to the client's age, and the tax components of their withdrawal.
Paola is 58 and has permanently retired. She has $1 million in a superannuation accumulation account, which has the following components at 1 August 2018:
Paola wishes to maximise the tax-free component of her accumulation account, prior to commencing an account based pension, without triggering any tax liability in the current financial year (2018/19).
The maximum lump sum withdrawal Paola can withdraw tax-free is calculated as follows:
Low rate cap in year of withdrawal ÷ % of taxable component (taxed element) of withdrawal
= $205,000 ÷ 0.90
Paola withdraws a $227,777.78 lump sum from her accumulation account. This consists of a $22,777.78 tax-free component and a $205,000 taxable component. Paola is required to include the $205,000 taxable component in her assessable income in the year of withdrawal, however as this amount is within the 2018/19 low rate cap she is entitled to a tax offset so that the rate of tax on this withdrawal is 0%.
Since Paola's total superannuation balance did not exceed $1.4 million the previous 30 June, she is under age 65 and she has not triggered the bring-forward
rule in the past two financial years, she then contributes the $227,777.78 as a
non-concessional contribution to her super in 2018/19.
Following this withdrawal and the non-concessional contribution, Paola commences an account based pension with the following amounts:
The tax-free proportion of an account based pension is fixed at commencement of the pension. Paola's pension payments will be 30.5% tax free as a result of this strategy. If Paola had commenced the $1 million account based pension without this strategy, the tax free percentage would have been 10%.
As with any strategy that may result in different tax outcomes the potential application Part IVA anti-avoidance should be considered.
The purpose of a re-contribution 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 re-contribution 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 (e.g. an adult child).
Last modified: Wednesday, May 1, 2019