If the term ”recontribution strategy” sounds complex to you, then you’re not alone. Luckily, it’s not that hard to understand. As the name indicates, you withdraw a lump sum of your superannuation savings1 and then recontribute it back into your superannuation account. This raises an obvious question. Why take money out of superannuation and then put it straight back in again?
Among other benefits, you can enjoy a tax saving. It’s just another great reason to invest in your superannuation. Read on as we explore how you, your spouse and dependants, could benefit from this strategy. But remember, you should always seek personal finance, legal and tax advice when deciding to make any financial investment decisions that may affect your retirement funds. It’s always better to be safe than sorry. The below information is to be used as a guide only.
When trying to get your head around how a recontribution strategy works, it’s important to understand how the money in your superannuation account is classified. There are two separate components:
The tax-free component (or tax-exempt component) of your superannuation account is generally the contributions on which you have already paid tax, so you don’t pay tax on them again when they are withdrawn.
Tax-free components mainly include your non-concessional (after-tax) contributions. These contributions also do not incur any tax when they are withdrawn either as a lump sum or a death benefit paid to the estate or beneficiaries.
The taxable components are generally the concessional contributions (such as Superannuation Guarantee payments made by your Employer and salary sacrifice contributions) held in your superannuation account.
They are calculated as follows:
Total superannuation account balance – non-concessional contributions = Taxable component
You may have to pay tax on the taxable component of your superannuation account depending on whether you withdraw it before or after age 60, and whether you leave your benefits to someone who the tax laws consider a dependant or a non-dependant.
For a recontribution strategy to be worthwhile, a large part of your superannuation benefit needs to be a taxable component, as the aim of the strategy is to reduce this taxable component and increase the tax-free component.
If only a small part of your superannuation benefit is taxable, it may not be worthwhile considering implementing a recontribution strategy. It’s always worth having a discussion with your financial planner, just to be safe!
Before using a recontribution strategy, you also need to check the rules about how you can withdraw money from your superannuation account.
Whenever you make a lump sum withdrawal from your superannuation, you must withdraw it in the same proportions as the tax-free and taxable components in your superannuation account.
For example, if your superannuation account has an 80% taxable component and 20% tax-free component, your withdrawal amount will consist of 80% taxable component and a 20% tax-free component. Withdrawals cannot be made from only one component of your superannuation account.
There are several situations where a recontribution strategy can be valuable:
Upon your death, if a taxable component of your superannuation account is paid to someone that is considered a non-tax dependant under the tax laws (such as an adult child), they may have to pay a significant part of the benefit in tax. (Spouses and dependants aged under 18 do not have to pay tax on a payment.)
Using a recontribution strategy to reduce the taxable component of your superannuation benefit can cut – or even eliminate – the tax payable by your non-tax dependant beneficiaries, so your beneficiaries receive a larger benefit. For some non-tax dependants, the tax rate payable when they receive a superannuation death benefit can be up to 32% including the Medicare levy.
If you are aged under 60 and withdraw a lump sum when you retire, the taxable component will be taxed at your marginal tax rate or 17%, whichever is lower. The tax-free portion is paid to you free of tax. Using a recontribution strategy to convert your taxable component into a tax-free component could reduce your tax bill.
When you retire and start withdrawing your superannuation benefits, there is a limit on how much you can transfer from your accumulation account into a retirement phase pension account. This is called the Transfer Balance Cap and is currently set at $1.7 million (in 2021–22).
If you have more than $1.7 million (in 2021–22) in superannuation, by recontributing some of your superannuation benefit into your spouse’s superannuation account, you may both be able to hold up to $1.7 million in retirement phase superannuation accounts. This means as a couple you can have up to $3.4 million (in 2021–22) invested in tax-free income streams. (From 1 July 2017 to 30 June 2021, the general transfer balance cap was $1.6 million.)
Using a recontribution strategy can allow you to use each partner’s transfer balance cap, with two account balances available to reduce the tax-free component and tax payable to non-tax dependants.
Making a non-concessional recontribution into your spouse’s superannuation account may mean you are eligible for a spouse contribution tax offset (up to $540 a year), while your spouse may be eligible for the government’s co-contribution payment.
To implement a recontribution strategy with your existing superannuation benefits, you need to be eligible to withdraw a lump sum from your superannuation account and you also need to be able to recontribute the money back into the superannuation system. This usually means you are:
If a recontribution strategy sounds like it could help you achieve your retirement or estate planning goals, there are some important points to consider before taking the leap:
Using a recontribution strategy with your superannuation account will no doubt only add to your superannuation balance, ensuring that you are looked after in your retirement years.
Again, you should always seek personal finance, legal and tax advice when deciding to make any financial investment decisions.
Are you a Muslim living in Australia and interested in investing in an Islamically compliant, government-registered superannuation fund? Then, contact us!
You should always seek personal finance, legal and tax advice when deciding to make any financial investment decisions.
1 Provided you are able to meet a condition of release to access your superannuation benefits and also eligible to make a contribution to superannuation.