What is a Recontribution Strategy?

A superannuation recontribution strategy involves withdrawing some or all of your super balance and recontributing back into super as a non-concessional contribution.

It is a reasonably common strategy recommended by financial advisers to their clients under certain circumstances.

So, what is a recontribution strategy?

To understand a recontribution strategy, it is important to first understand superannuation tax components.

Your superannuation balance is made up of taxable components and/or tax-free components.

The reason tax components (or tax elements) are important is because they determine the validity of a recontribution strategy.

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Ultimately, you want your super balance to have a high level of tax-free components and a lower level of taxable components.

If your super balance consists of a high level of taxable components, a recontribution strategy can be used to replace them with tax-free components.

What Are Superannuation Tax Components?

When a contribution is made to your superannuation accumulation account and a tax deduction is not claimed (after-tax contribution) it forms part of ‘Tax Free’ component. Such contributions are referred to as Non-Concessional Contributions.

To work out the ‘Taxable Component’ of your superannuation balance, you simply add up all of the Non-Concessional Contributions that have been made to your account and deduct it from the total balance of your account.

Whatever is left is considered the Taxable Component.

For example, let’s assume that you have a superannuation balance of $300,000.

Over the years, this account has received total combined Non-Concessional Contributions of $50,000.

Your balance would be as follows:

Component $
Tax Free $50 000
Taxable $250 000
Total Balance $300 000

This means that the Taxable Component is effectively made up of Concessional Contributions (such as SGC and Self Employed), as well as any positive or negative earnings within the account.
 

Why Do Tax Components Matter?

 
Ideally, you want your account to have a higher Tax Free Component than a Taxable Component for the following reasons:

1. If you pass away and your balance is paid to a non-dependent (e.g. child over 18), 15% death benefits tax will be payable on the Taxable Component

2. If you are under age 60, the Tax Free component is received tax free on any withdrawals, including income payments (assuming you can access your super); whereas the Taxable Component is assessable for tax purposes.

3. If there are future changes in legislation whereby the Taxable Component is once again taxed on withdrawal for those over aged 60, you will be better positioned if you have more of a Tax Free Component.
 

How Does a Recontribution Strategy Work?

 
Let’s go with the same balance stated above. A $300,000 super account made up of $250,000 Taxable and $50,000 Tax Free.

Our intention is to convert the Taxable component into a Tax Free component.

For the purposes of this, we will assume that you are over age 60, but under 65, and have met a full condition of release of your total benefits.

Therefore, you should have the ability to withdraw your total balance tax free as a lump sum (check to make sure you don’t have any Taxable-Untaxed component – this may result in tax).

We will also assume that you have not triggered the bring forward rule for Non Concessional Contributions in the previous two financial years.

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All withdrawals must be made proportionately.

This means that we should not simply withdrawal the $250,000 Taxable Component and recontribute it, as this would contain part of the Tax Free Component and would leave part of the Taxable Component inside super and we would not be maximising the strategy.

We must withdrawal the total $300,000 and recontribute it back in as a Non Concessional Contribution.
 

What About the Non Concessional Contribution Cap?

 
The Non Concessional Contribution Cap is currently $100,000.

However, you have the ability to ‘bring forward’ up to two more years’ worth of the cap if you are under age 65 – effectively allowing you to contribute up to $300,000.
 

Recontribution Strategy Outcome?

 
As you can see, by withdrawing the total balance, which consisted of 83% Taxable component and re-contributing it as a Non Concessional Contribution, we have transformed the total balance solely into Tax Free components.

Based on this, it could save up to $42,500 in death benefits tax!

Use this calculator to calculate the benefits of a superannuation recontribution strategy on your balance.

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Recontribution Strategy Considerations?

 
Here is a non-exhaustive list of some things you should consider prior to implementing a Recontribution Strategy:

1. If you have met a full condition of release but are under age 60, you may not be able to withdraw your total balance tax free. If this is you, please refer to the Lifetime Low Rate cap amount on the Taxable Component of lump sums here and seek advice from a professional.

2. If you have previously triggered the bring forward rule or made large Non Concessional Contributions in the current financial year, you may be at risk of exceeding the Non Concessional Contributions cap which can result in significant Excess Contributions tax.

3. If your balance is greater than $300,000, you will be unable to fully convert your balance solely into Tax Free components.

4. Withdrawing any amount from your superannuation may require the sale of assets which could incur Capital Gains Tax (CGT) and or investment transaction costs.

5. People over the age of 65 may be unable to make Non Concessional Contributions to superannuation unless they are still working. Even then, they are not able to utilise the ‘bring forward’ rule.

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. If you’re looking for more personalised advice, have a chat with one of our experts at www.superguy.com.au/need-advice

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6 Comments

  1. Tim

    Thanks for the article.

    If you are over 60 but under 65 and have met a full condition of release (eg fully retired), say you take out the full amount and then re-contribute it as you say. You now have $500,000 as tax free.

    However, as you are still under 65, this amount that you have re-contributed – is this amount automatically unrestricted still? (as you are still permanently retired) Or is it considered to now be preserved until you meet another condition of release? (eg retire again, or turn 65)

    Thanks Chris!

    Reply
    • Chris Strano

      Hi Tim, very good question! My understanding is that it will be unrestricted if not re-engaged in work. It should only be subsequent contributions after returning to work that would become preserved.

      Reply
  2. Stacey

    Thanks for your article Chris. Does the cash out have to be done in 1 lump sum & recontributed in 1 lump sum each year or can it be made up of a number of transactions? And does both the cash out & recontribution have to occur before the member’s 65th birthday? Can this also be done for a 64 year old on a Transition to Retirement Pension?

    Reply
    • Chris Strano

      Hi Stacey
      I hope this helps
      A recontribution strategy is generally intended to be done once as a lump sum withdrawal and recontribution – converting as much of your taxable component into a tax free component.
      All earnings within accumulation phase are effectively allocated to the ‘taxable’ component, so the longer your balance sits in accumulation phase, the more it is contaminated with taxable components. To avoid this, a withdrawal can be made, recontributed to super and immediately used to commence an income stream, whereby components become fixed and earnings are proportionately allocated.
      Whether or not the contribution needs to occur prior to age 65 depends on the account balance, previous contributions and satisfying the work test. Under age 65 simply allows greater amounts to be contributed. A person over age 65 may not be able to contribute.
      A 64 year old on a TTR can do a recontribution strategy; however there may be many other consequences associated.
      If you are considering a recontribution strategy, you should definitely seek advice from your adviser or accountant prior to implementation. It is not something you want to get wrong. Also remember the contribution caps!

      Reply
  3. ray Hudson

    Hi Chris, I plan to retire July, turn 60 in August and want employ a recontribution strategy. My funds at present are in accumulation mode. Most of my funds are tied up in stocks, so don’t want to sell. I do have about $100,000 cash available in my fund for this. What is the best time to employ a recontribution strategy, just before converting funds from accumulation to pension phase, or does it not matter if in pension phase? If so, can I over the next several years (up to 64 years) make lump sum withdrawals and then recontribute as a non-concessional contributions back to my fund? I am aware of the caps involved.

    Kinest regards
    Ray H.

    Reply
    • Chris Strano

      Hi Ray
      1.The difference between accumulation and pension phase in relation to tax components is that, in accumulation phase the component ratio is influenced by contributions and earnings; whereas as soon as a pension commences, the ratio is locked in for the life of the pension.
      2.All withdrawals in either case must be made proportionately from the taxable and tax free components. This means that, multiple recontributions will need to occur to continue reducing the taxable component, taking into account contribution caps, unless the total balance is withdrawn and recontributed in one hit – also taking into account the caps.
      3.Commencing pensions can be useful for segregating balances that have a high ratio of either taxable or tax free components.
      4.You can still make contributions, despite having a pension account and may even be able to continue contributing past age 65.
      Keep in mind that any withdrawals/pension payments under age 50 may incur tax.
      5.You should seek advice from a qualified financial planner to maximise the outcome of a recontribution strategy. Because having limited liquid funds in which to do a recontribution strategy over a number years can be tricky.
      Hope this helps.

      Reply

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