At the risk of appearing mundane, this week’s comment is on the well-established recontribution strategy.
Its primary purpose is to reduce a member’s taxable component, thus reducing the tax payable by non-tax dependants on the member’s death. It can also be useful in equalising member balances between spouses. A successful recontribution strategy will often result in a member having two pension accounts and, possibly, a residual accumulation account. Going forward, the member would make any withdrawals, in excess of the minimum pension requirement, from the accumulation account then, once used up, from the pension account with the least favourable tax components.
Essentially it involves making a, generally, tax free withdrawal and recontributing it as a non-concessional contribution. Alternatively, as an equalisation measure, it may be contributed for the member’s spouse. Either way, the overall balance in superannuation remains the same but the tax-free component is increased.
There are a number of mandatory considerations.
The member’s account must be unrestricted non-preserved for the withdrawal so the member will generally be 60 and retired, or over 65.
The receiving member must be eligible to receive the contribution. This will require careful consideration of both age and total super balance implications.
The withdrawal and subsequent contribution must be cash flowed so asset sales may be required. If so, it will generally be more tax efficient for the member/s to be in pension phase to reduce, or remove, the impact of CGT. Note that, a series of withdrawals and contributions can be effective, thereby reusing the cash account balance, if an asset sale is impractical.
In some circumstances it may be advantageous for the cash withdrawal to be replaced by a contribution in specie.
To maximise the strategy’s advantage the non-concessional contribution should be separated from any account containing a taxable component. This is not possible if the receiving member is not eligible to commence a pension as the contribution will be made into an existing accumulation account thus diluting the tax-free portion. If, the member can commence a pension then they should convert as much of their member account to pension as possible before making the contribution. This is because a pension is a discrete superannuation interest so, when the contribution is made to their accumulation account, there will be little, or no, tax free component dilution. Usually, a new pension would then be commenced from the accumulation account. Note that this could require a partial commutation of an existing pension subject to transfer balance cap requirements. A transition to retirement pension can also be useful for quarantining superannuation interests though the 10% withdrawal limit would often make it more useful where the contribution is being made to a spouse with a TRIS or for maximising the tax-free component when a member is simply making a voluntary contribution.
There are circumstances where a variation on the recontribution strategy, but with the same objective, can be useful. Such an opportunity can arise with downsizer contributions.
Be aware that the contribution strategy will use the member’s non-concessional contribution capability which might be better used to introduce additional money to their account. The strategy, insofar as it is used to maximise the tax-free portion of the member’s account, does not give the member any benefit. Those who will benefit are the member’s non-dependant children, or the member’s estate generally, on the member’s death.
