Recontribution strategy

A recontribution strategy is a strategy that allows people to save tax that is paid to beneficiaries in the event of their death. While Australia does not have an inheritance tax, taxable superannuation proceeds will be taxed if they are received by a ‘non tax dependent beneficiary’ (this is usually adult children).

When exploring this strategy, it is important to first consider taxable and tax free components of superannuation. Quite simply, the taxable component on your superannuation fund is comprised of the funds that have been contributed ‘pre-tax’. This is in the form of employer or salary sacrifice contributions. The tax-free component of your superannuation are funds that have been contributed after tax. Should you pass away, your non-tax dependent will pay tax on the taxable proceeds, however will not pay any tax on the proceeds of the tax-free component. Given this fact, it is simple to see the benefit in converting funds from taxable to tax-free inside of superannuation.

A recontribution strategy involves withdrawing funds from superannuation and then re-contributing these funds back into the same fund. When withdrawing funds (usually after the age of 60 and ceasing work, or after the age of 65) there will be no tax on the withdrawals. By then contributing these funds back as an after-tax contribution, these funds will be categorised as tax-free. Hence if these funds were to pass on to a not tax dependent beneficiary (like an adult child), these funds will attract no tax.

An example of how much of an impact this can make:

If a person was to withdraw, $330,000 from their superannuation fund after the age of 65, this will not attract any tax. Should that same person then re-contribute the funds to superannuation (using the bring forward rule) there will be no tax that will be paid, irrespective of which beneficiary were to receive these funds. If the same person was not to embark on this strategy, there would be approximately $56,000 in tax paid.

A recontribution strategy is a selfless strategy, as this will save tax that your beneficiaries pay rather than to you. You must consider the buy-sell and transaction costs that are involved when embarking on this. Additionally making sure that you do not breach withdrawal or contribution limits to superannuation is imperative and hence it is very important to receive advice on this strategy prior to embarking on something like this.