The re-contribution strategy is still attractive
On the 3rd May 2016, the federal government announced an immediate cut to the non-concessional contribution limit.
The cap is now a lifetime limit of $500k.
This cut to the non-concessional cap does affect the very popular re-contribution strategy but it still applies and it is definitely worth implementing with your SMSF.
You or your independent beneficiaries could save up to $82,000 in tax if you use the re-contribution strategy under the current non-concessional cap of $500,000.
Some background information;
Your superannuation benefits are made up of two components, a tax free component and a taxable component. The tax free component is always tax free when you start taking your super benefits or when you leave your super benefits to a dependant or independent person after you die. So if you have super benefits that is 100% tax free there won’t be any tax paid anywhere, whether you start taking benefits from your super or leave it to an individual when you pass away.
The taxable component may be subject to tax. If you are under 60 and start taking a pension, the taxable component will be subject to tax. If you leave your super benefits to an independent person (adult children) the taxable component will be subject to tax.
What the re-contributions strategy does is it reduces your taxable component and increases your tax free component. It’s a very effective estate planning strategy.
For example.
If you pass away and leave $100,000 to your adult child from your super benefits and the $100,000 is made up of all taxable, the adult child will need to pay approximately $16,500 in tax. However, if the benefit was made up of all tax free the adult child will pay zero tax.
If you have any questions relating to the non-concessional re-contribution strategy then please feel free to call;
Cayle Petritsch
SMSF Specialist Advisor
T: 02 9984 7774
E: caylep@nac.com.au
Martin van der Saag
Director
T: 02 9984 7774
E: martinv@nac.com.au
“The re-contribution strategy remains a powerful way to improve tax outcomes and estate planning flexibility.”
About the author
Marius Fourie - Director & Business Advisor
As Director and Business Advisor, Marius uses his accounting expertise and empathetic skills to work directly with business owners and help them feel at ease with their finances.
Marius saw a common need in clients that just wasn’t being met by accounting providers.
That need was for clear, open communication and streamlined accounting services that didn’t come padded out with any unnecessary features.
Business owners just don’t have time to compare different accounting firms to see which one has the best packages with the best inclusions (many of which they would pay for but never use).
Key Takeaways
The Strategy Is Still Relevant
Despite superannuation reforms, re-contribution remains a valuable planning tool.
Estate Planning Benefits Are Significant
Converting taxable super to tax-free can reduce tax for beneficiaries, particularly adult children.
Contribution Caps Must Be Managed Carefully
Non-concessional contribution limits and total super balance rules must be considered.
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Frequently Asked Questions
What is a re-contribution strategy?
A re-contribution strategy involves withdrawing super benefits (once eligible) and re-contributing them back into super, typically as non-concessional contributions.
Why would someone use a re-contribution strategy?
It is commonly used to convert taxable components of super into tax-free components, improving tax outcomes for beneficiaries.
Who can use a re-contribution strategy?
Individuals who have met a condition of release and are eligible to make non-concessional contributions may be able to use this strategy.
Has the re-contribution strategy changed under recent super rules?
While contribution caps and balance limits have changed, the strategy can still be effective when applied within current rules.
Is professional advice important before implementing this strategy?
Yes. Incorrect execution can lead to excess contribution issues or unintended tax consequences.
Does this strategy still work even though the non-concessional cap was reduced?
Yes — while the non-concessional contribution cap was reduced to a lifetime limit of $500,000, the strategy can still be worthwhile and remains relevant for SMSF members in the right circumstances.
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