What is a super recontribution strategy?

A super recontribution strategy is a way of reducing the amount of tax payable on any money you or your beneficiaries receive from your super fund.

If this strategy is something that could work for you then it’s worth considering. So how does it work?

How does a super recontribution strategy work?

Basically the strategy does what it says: you take money from your super and then recontribute back into your fund.

First, you need to meet the conditions of release where you can access money from your super and still be able to make contributions. You will need to check with your super fund to see if you meet those conditions, such as reaching your preservation age, which varies depending on when you were born.

The strategy works on the basis that money in your super fund may consist of pre-tax and post-tax contributions, known as concessional and non-concessional contributions.

Concessional contributions include those made by your employer as part of statutory super guarantee contributions, and any monies you’ve paid as part of any salary sacrificing.

Non-concessional contributions include any monies you’ve paid after-tax, subject to certain limits.

When you withdraw money from your super, the amount will be split proportionally between the taxable and non-taxable portions of your fund, depending on how much of each type of contribution has been made.

Thus, you will pay tax on the proportion of concessional contributions that makes up your withdrawal, but not the proportion of non-concessional contributions.

Then, when you contribute that money back into your super fund, it will be considered a non-concessional contribution, so will be considered to be already taxed.

What you have effectively done is increase the amount of money in your fund that won’t be subject to any further tax when you withdraw funds at a later stage.

Timothy Collins, a financial adviser at Talem Wealth, gave Canstar a typical hypothetical example of how the strategy can work to increase the tax free component of a person’s super fund.

“John is 61 years old and retires from work,” he said. “He has $500,000 in super which he has accumulated through normal employment contributions and investment earnings. His super fund is 100% taxable.

“John seeks advice and withdraws $330,000 of his superannuation, tax-free, into his personal bank account.

“John then makes the maximum non-concessional contribution to his super using his $330,000, utilising the bring forward rule (which allows him to pay three times the non-concessional contributions cap into his super in one financial year without having to pay extra tax).

“John now has $500,000 in super, but this is now 66% tax free.”

→Read more: What is the bring-forward rule and how does it work?

When might a super recontribution strategy be suitable?

A super recontribution strategy may be useful if you want to reduce the tax payable on your super in the event that you die and the fund is inherited by a non-dependant, such as an adult child.

Typically, an inherited super benefit is paid as a lump sum and the taxable portion still needs to be paid for.

If you implement a super recontribution strategy then you may be able to reduce or eliminate the taxable portion of your super, meaning whoever inherits the money may pay less tax.

Consider the example of John from before, who has now died, and assume he made no recontribution to his super fund.

“John’s superannuation is 100% taxable, the result is that there would be tax payable on the super of 15% plus Medicare levy (2%) so $85,000 in tax payable,” said Mr Collins.

“Assume John has completed the above recontribution. He dies and 66% of his super is tax-free. This means that the 17% tax from the above example is only levied against $170,000 of his super and therefore the tax reduces to approximately $28,900.”

Watch out for extra costs

There are a few things to be aware of before embarking on any super recontribution strategy.

You need to consider what impact any withdrawal may have on your accessible income during that financial year as this could affect what tax you pay or benefits you receive.

You also need to make sure you don’t exceed any annual caps on how much you can make in non-concessional contributions.

Whether the strategy is right for you will depend on your personal circumstances so it’s important to consider seeking independent financial advice, and you may like to talk to your super fund.

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