The benefits of re-contribution

From July 1, anyone up to age 74 can now add to superannuation without having to meet a “work-test” criteria.

This change presents a great opportunity for retirees, beyond the obvious benefit of adding surplus savings and windfall amounts to superannuation.

At Muirfield, we have begun implementing a re-contribution strategy for many of our clients.

A re-contribution strategy is used to reduce the taxable component of a superannuation account while simultaneously increasing the tax-free component.

You might be thinking “Isn’t my superannuation already tax free?” It likely is, though the benefit of this strategy isn’t necessarily for the account holder, rather it reduces the tax that may be paid by a non-tax dependant beneficiary of your superannuation account.

To keep things simple, a non-tax dependant is typically someone who is not your spouse and does not rely on your financially. In most cases, adult children are considered non-tax dependant beneficiaries.

If you pass away and your superannuation benefit is paid to a non-tax dependant, tax of up to 15 per cent (plus a 2 per cent Medicare levy) may be charged on the taxable component of your account.

A re-contribution strategy is particularly effective for superannuation account holders who have a high taxable component and have a non-tax dependent beneficiary for their superannuation account. We commonly see this with retiree widows.

There are several elements that need to be considered before implementing this strategy, including:

• Impact on Centrelink benefits
• Capital gains tax upon selling investments
• Transaction costs to sell and repurchase investments
• Superannuation access restrictions
• Superannuation contribution caps, and
• Total superannuation balance and transfer balance cap.

If you would like to understand how this may relate to your circumstances, we encourage you to contact the Muirfield team on 5224 2700.

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