In the days when superannuation benefits were subject to tax no matter how old you were, recontribution strategies were all the rage. The outcome for a lot of people was that with little or no effort, cost or tax, they could swap their super deckchairs around and have more of their super classified as “tax-free” money.
They did this by taking money out of super and putting some or all of it back in as a non-concessional (or after-tax) contribution. Tax-free super can be paid to a member during their lifetime (as a pension or lump sum) without any tax being deducted. Similarly, it can be paid to their beneficiaries when they die with no tax cost.
Major tax changes in 2007 and then again in 2017 made this strategy far less useful and also harder to do. It was less useful because, in 2007, most people stopped paying income tax on their super pensions – and so they no longer had anything to gain personally from the strategy. It became harder to do in 2017 because tightened contribution rules meant getting money back into super was far more of a challenge than ever before.
So not surprisingly, recontribution strategies became much less interesting and much less common.
But there are still several valid reasons for considering them even today.
First, they are still highly relevant when it comes to minimising the taxes paid by beneficiaries on a member’s death. While spouses generally inherit their partner’s super tax-free no matter how it is made up behind the scenes (taxable or tax-free components), the same is not true for adult, financially independent children.
The tax bills can be enormous. A 50-year-old adult child inheriting $500,000 in taxable component from their 80-year-old parent’s super could pay up to $75,000 (plus Medicare) in tax. The tax rate is deceptively low (only 15 per cent) but it is one of those rare times in life when tax is applied to capital rather than income – making the financial impact eye-watering.
Second, particularly in the current environment, there is some value in “future proofing” super arrangements. Who knows whether super pensions will always be tax-free for most people? If that changes, those who didn’t carry out a recontribution strategy when they could have may well regret it.
The “when they could have” part is important because a key part of the strategy is getting money back into super. These days only those who are under 67 (previously 65) can make these types of contributions easily. After 67, only those still working can make them and after 75, they are not possible at all. And of course there are always limits on the amount of non-concessional contributions to super without going over the relevant cap (which involves extra taxes).
Anyone with more than $1.6 million in super has a cap of nil. Everyone else has a cap of $100,000 a year unless they are able to use the special “bring forward rules”. The bring forward rules allow certain people to use next year’s cap and possibly even the year after’s in advance – making it possible to contribute $200,000 or $300,000 in a single year.
'Bring forward rules'
A key change working its way through parliament will actually make a recontribution strategy much more accessible for those between 65 and 67. This is a change to the “bring forward rules” that will make the higher caps ($200,000 and $300,000) accessible to more people.
Historically, only those with less than $1.4 million in super at June 30, 2020 (ie, just before the start of this financial year) who were younger than 65 on July 1, 2020 (the start of this financial year) can make a non-concessional contribution of $300,000 (all three years at once) in 2020-21. Those with more than $1.4 million but less than $1.5 million can only bring forward one year’s extra cap and contribute $200,000 this year. Those with more than $1.5 million but less than $1.6 million only get the current year’s cap, and those with $1.6 million or more cannot make non-concessional contributions.
If the new legislation is passed, “65” in these rules will change to 67.
This is a boon for recontribution strategies for a few reasons. First, it will be possible to do it for longer – the golden $300,000 opportunity will last until the year in which the contributor turns 67. (Just remember that only people who are working get to put these contributions into super after they turn 67, so someone who retired years ago and wants to take advantage of this new opportunity needs to do so before their birthday this year.)
Secondly, anyone over 65 is allowed to take their money out of super (the first leg of a recontribution strategy) whether they are working or not. So for many people there will now be quite a lengthy period where they can do all the things they need to do for a recontribution strategy – take the money out of super but also put it back in.
As of September 15th this change in legislation is awaiting debate in Parliament and had not yet been passed.