What is a re-contribution strategy?

A re-contribution strategy involves withdrawing all or a portion of your super as a lump sum, paying any tax and then re-contributing the balance, subject to contribution rules, back into either your or your spouse’s super fund. The reason for undertaking this strategy is to convert the taxable component of your super benefits into the tax free component, or to move your super into your spouse’s name.

There are a number of reasons why you might consider undertaking a re-contribution strategy:

• Estate planning
• Tax planning
• To fully utilise both of your transfer balance caps
• To maximise Centrelink benefits
• To access the spouse contribution offset or the Government co-contribution

All of these are discussed further below.

What are the benefits of this type of strategy?

Estate planning

Your super is split between a tax free component and a taxable component. When the taxable component is paid after your death to a non-tax dependant such as your adult children, they may lose up to 30% (plus Medicare) in tax.
By undertaking the re-contribution strategy you are able to convert your taxable component into a tax free component, and this should reduce the tax payable when you die.

For more information on how super is taxed on death, please refer to the ‘Withdrawing from Super’ fact sheet under the Superannuation Financial Education Series.

Income tax planning

When you use your super to start an income stream, part of the payment may be taxable if you are under age 60. The portion of the pension paid from your taxable component is taxed at your marginal tax rate less a 15% tax offset. The portion paid from the tax free portion is tax free.

By undertaking the re-contribution strategy you are able to convert your taxable component into a tax free component, and this should reduce the tax payable from your pension.
For more information on how income streams are taxed, please refer to the ‘Account Based Pension’ fact sheet under the Retirement Income Financial Education Series.

Fully utilise your Transfer Balance Caps

You are only able to invest $1.6 million into tax free retirement income streams, but if you are a member of a couple you each get a limit of $1.6m, meaning you can have a total of $3.2m invested in tax free income streams.
By undertaking the re-contribution strategy and contributing the money into your spouse’s super, you are able to use both of your transfer balance caps. You will also increase the amount of tax free component for your spouse which means you can take advantage of the two strategies above.

Increase Age Pension benefits

As amounts held in super aren’t assessed under the Centrelink Assets and Income tests until you reach Age Pension age, you can use this strategy to move super into your younger spouses name to help the older spouse qualify or increase their Centrelink entitlements. Additionally, you may be able to gain access to a Pensioner Concession Card or Low Income Health Care Card.

Receive a Tax offset and/or Government co contribution

A final benefit of the re-contribution strategy is that the person making the contribution into their spouses super may be eligible for a tax offset of up to $540 (provided all requirements are met). On top of that, the person receiving the contribution may be eligible for the Government co-contribution of up to $500 (again assuming all requirements are met).
Your adviser can help you work out if you qualify for these additional benefits.

How does a re-contribution strategy work?

To use a re-contribution strategy, you must:

• Meet a condition of release to be able to access your super and make the withdrawal, and
• Be eligible to contribute to either your or your spouse’s super.

Please refer to the fact sheets on ‘Super Contributions’ and ‘Withdrawing from Super’ under the Superannuation Financial Education Series for further information.