Recontribution strategies for older Australians made possible by rule changes

The 2021 federal budget introduced sweeping changes to superannuation, most of which have become law. Two major changes are now in force:

• removing the work test requirement for non-concessional super contributions for people between 67 and 75 and
• extending the eligibility for individuals under 75 to make non-concessional contributions using the bring-forward rules – are rewriting the rule book for recontribution strategies relating to estate planning and spouse balance equalisation.

The work Test Changes

From 1 July 2022, those aged 67-74 no longer need to meet a work test to be able to contribute to super. There also continues to be no work test requirement to receive Super Guarantee or award contributions.

However, for individuals wanting to claim a tax deduction for their personal super contributions, there is no change to the work test definition. This means individuals must work at least 40 hours in 30 consecutive days in the financial year the contribution is made to be able to claim a tax deduction for their personal contribution.

Bring-forward rule changes

Briefly, the bring forward arrangements allowed individuals to contribute up to 3 times the annual non-concessional (after tax) contributions cap provided certain criteria were met.

Under the old rules, one of the major restrictions is that the bring-forward arrangements were available only to individuals aged 67 or less.

From 1 July 2022, that has been extended to those aged 74 or less on July 1 of a financial year. But no other eligibility requirements to access the bring-forward arrangements have changed

A potential recontribution strategy exists

A recontribution strategy involves a member withdrawing a tax-free amount from their super account, and then recontributing it to their super account as a non-concessional contribution. It typically involves withdrawing an amount from super that comprises a taxable component, or a proportionate amount of taxable and tax-free amount, and then recontributing it as a non-concessional contribution. The result is the taxable component is converted to a tax-free component.

With the work test no longer being a barrier for individuals aged 67-75 making a non-concessional contribution, it means many can use this strategy.

Helping adult kids

Although the taxable and tax-free status of your super benefit may not matter much if you are over 60 (as a lump sum or super pension paid to you after 60 is typically tax-free), it does matter on your death. That’s because super death benefits that are paid to a non-tax dependant (such as an adult, non-financially dependent child), are subject to tax, with tax being deducted from the taxable component of your benefit.

As a recontribution strategy reduces the proportion of your benefit that is classified as a taxable component and increases the proportion that is classified as a tax-free component, it has the effect of reducing the tax that may otherwise be payable when the benefit is paid to a non-tax dependant.

Helping your spouse

Recontribution strategies can also be used to even up balances between spouses. This can be particularly useful if one spouse is getting close to the transfer balance cap and the other spouse is well under their cap. Removing funds from one and adding them to the other can maximise the combined amount that can be transferred to the pension phase when the couple retires.

However, it’s important to note recontribution strategies are subject to the same contribution caps, age limits and total superannuation balance limits that normally apply to non-concessional contributions.

For SMSF members, if the withdrawal is likely to require the sale of one of more fund assets, it is also important to consider and factor in any potential CGT and other transaction costs such as brokerage and conveyancing costs.

A recontribution strategy can be a powerful estate planning and spouse equalisation strategy, but there can be many traps for the unwary. If you wish to discuss your specific circumstances in using the recontribution strategy, please contact our office on (02) 4601-1000.