What is a Super Recontribution Strategy?

Concessional vs. non-concessional

There are two types of contributions you can make to your super, concessional and non-concessional. Concessional contributions include the super guarantee paid by your employer or any salary sacrifices. These come from your pre-tax income, and are therefore taxed when you withdraw them. Non-concessional contributions are any amounts you pay into your super from your after tax personal income, and do not pay tax when they are withdrawn.

When you make a withdrawal from your super, the withdrawal will be split between the taxable and non-taxable portions of your fund, depending on how much of each type of contribution you have made. For those aged 60 or older, your super benefits are tax free. However, if you are 59 or younger, you will have to pay the tax owing on any super withdrawal. Thus, you will pay tax on the proportion of concessional contributions that makes up your withdrawal, but not the proportion of non-concessional contributions.

How does recontribution work?

A recontribution strategy, therefore, involves making a lump sum withdrawal and then recontributing it into your super fund where it will be classified as a non-concessional contribution. This means the tax-free proportion of your super will increase.

A recontribution strategy can be a way of reducing your tax liability if you are going to be receiving a super income stream, like an account-based pension. By paying the tax on the applicable portion of your super now, and then returning it to your super fund, you may save money in the long run.

You might also be able to reduce the tax payable on your remaining super in the event that you die and it is inherited by a non-dependant, like an adult child. Typically, an inherited super benefit is paid in a lump sum and the taxable portion still needs to be paid for. By recontributing, you may be able to reduce or eliminate the taxable portion of your super, meaning that your inheritor might pay less tax.

Watch out for extra costs

There are a few things to be aware of before embarking on this strategy, however. When you initially make a withdrawal with the intent of recontributing, you will have to pay for the taxable portion of the withdrawal. You could also be hit by market volatility affecting the buy/sell spread, decreasing the value of your withdrawal.

Further, this strategy is likely to impact your assessable income for the year, potentially costing you more in income tax or to lose out on certain government benefits that are means tested. Finally, you need to ensure that your recontribution doesn’t exceed the contribution cap of $100,000 a year, or up to $300,000 if you are eligible for the bring forward rule.

Who can use this strategy?

To use the recontribution strategy, you need to be able to access your super and to still make contributions, which can be tricky. To access your super you need to have reached a condition of release, like retiring or reaching 65. To continue making contributions, you need to be either under 65, or be under 75 and work for at least 40 hours over at least than 30 days in a financial year.

Recontributing is most likely to be beneficial to those aged between 60 and 65, as they do not need to pay tax on the taxable portion of their super, while still being able to access the bring forward rule to make a contribution of up to $300,000 in a single year. However, this is still a complex financial action, and it is important to seek independent financial advice, as your situation may differ.

For more on super, make sure to check out the dedicated Canstar super page, where you can also compare super funds.

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The following table contains details of the superannuation funds rated by Canstar based on someone aged 40-49. This table has been sorted by one-year performance (highest to lowest).

Please note that the performance information shown in the table is for the investment option used by Canstar in rating of the superannuation product.

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