Maximising the Benefits of the Recontribution Strategy

In the last few years, the number of members and SMSFs utilizing the withdrawal and contribution strategy has grown significantly for members aged 60 to 74.

This has been due to in recent years the changes to super which have included abolishing the work test, the introduction of Total Super Balance Caps and allowing members to make catch-up contributions up to age 75.

The key benefits of a recontribution strategy are:

1. Tax reduction and estate planning by:

• Minimising tax on taxable income stream payments (members under 60)
• Reducing taxes on death-benefits for non-tax dependents

2. Super Balance Management by:

• Maximising retirement phase pensions taxed at concessional rate
• Managing total super balances (TSB) between couples and preserving eligibility for future contributions.
• Maximising social security benefits if a spouse is below the age pension

The recontribution strategy is particularly appealing to SMSFs, as they have the flexibility and control to maximise their after-tax income and increase the tax-free amount in their SMSF with less paperwork than retail or industry funds.

The strategy's popularity was highlighted in the recent AFR, “This Super Loophole Can Create Tax-free Money for the Kids.” https://www.afr.com/wealth/personal-finance/this-super-loophole-can-create-tax-free-money-for-the-kids-20241021-p5kk22

Trustees and Advisers must get the process right to maximize the benefits of the strategy.

Implementation tips to consider:

• Ensure the minimum pension is paid before any lump sum amounts are withdrawn
• Ensure any accumulation balance is converted to a new pension before the re-contribution is made back to the fund (otherwise the amount in the accumulation phase will not be 100% tax free)
• Once a re-contribution is made back to the fund, a new pension is established immediately to ensure the pension is 100% tax-free (if any concessional contributions are added to the fund before the new pension is established the pension will not be 100%)
• Ensure the funds physical leave the super system and re-enter (can’t be journal entries).