Recontribution Strategies — Making Your Super More Tax-Efficient

What Is a Recontribution Strategy?

A recontribution strategy involves withdrawing some of your superannuation as a lump sum (usually after reaching preservation age and retiring) and then recontributing it as a non-concessional (after-tax) contribution. The purpose is to convert the taxable component of your super into a tax-free component. This is particularly beneficial for estate planning — when you pass away, your beneficiaries may receive the tax-free component without any tax liability.

How It Works

Your super balance is made up of two components: a tax-free component (from non-concessional contributions) and a taxable component (from concessional contributions and investment earnings). When you withdraw super, the tax-free component comes out first. By withdrawing and recontributing, you can increase the proportion of your super that is tax-free. However, there are limits — you must stay within your non-concessional contributions cap (currently $120,000 per year, or up to $360,000 under the bring-forward rule).

Who Should Consider This Strategy

Recontribution strategies are most beneficial for people over preservation age with a significant taxable component in their super and who are concerned about the tax their beneficiaries would pay on death benefits. It may also be useful for those who want to maximise their tax-free super pension in retirement. The strategy is less beneficial for younger people or those with small super balances.

What Your SOA Should Cover

If your adviser recommends a recontribution strategy, your SOA should clearly explain the tax implications, the contribution caps involved, the impact on your super balance, and any costs such as buy-sell spreads or transaction fees. It should also explain the risks — including changes to super laws or contribution caps that could affect the strategy. The benefits should be weighed against the costs and alternatives.

Understanding Taxable and Tax-Free Components

Your super balance consists of two components: a tax-free component (generally contributions made from after-tax money) and a taxable component (employer contributions, salary sacrifice, and investment earnings). When you die, the tax treatment of your super death benefit depends on which component it comes from and who receives it.

Non-dependent beneficiaries (such as adult children) pay tax on the taxable component of a death benefit received from super. The taxable component from a taxed fund is taxed at up to 17% (including Medicare Levy), while the tax-free component is not taxed. A recontribution strategy aims to convert taxable components into tax-free components, reducing the tax burden on your beneficiaries. The strategy works by withdrawing super benefits as a lump sum (which crystallises the component) and then recontributing them as non-concessional contributions, which become part of the tax-free component.

How the Strategy Works in Practice

To implement a recontribution strategy, you typically withdraw a lump sum from your super (after age 60, these withdrawals are tax-free) and then recontribute the amount back into super as a non-concessional contribution. The withdrawn amount comes out proportionally from both components, but the recontributed amount goes entirely into the tax-free component, shifting the balance over time.

The strategy is limited by the non-concessional contributions cap ($120,000 per year, or $360,000 under the bring-forward rule). If you are over 75, you generally cannot make non-concessional contributions unless you meet the work test. The strategy also requires you to be under the total super balance cap ($1.9 million) at 30 June of the previous financial year to make non-concessional contributions.

When Recontribution Strategies Make Sense

Recontribution is most beneficial for individuals with a large taxable component in super who want to leave their super to non-dependent beneficiaries. It is also useful for estate planning purposes, especially if you have adult children who would pay tax on the taxable component. The strategy is less beneficial if your beneficiaries are all tax-dependent (spouse, children under 18, or financial dependents) since they receive death benefits tax-free regardless of the component.

Your adviser should model the tax saving against the opportunity cost of withdrawing the funds (if they leave the super system temporarily) and any transaction costs. The SOA should clearly show the projected reduction in death benefits tax and the time required to complete the strategy given the contribution cap constraints.

Frequently Asked Questions

Can I do a recontribution strategy if I am under 60?
Yes, but the tax treatment is different. Withdrawals before age 60 may be subject to tax, reducing the effectiveness of the strategy. The strategy is most tax-effective from age 60 when withdrawals from super are generally tax-free.

How long does a full recontribution strategy take?
It depends on the amount you want to convert. With a non-concessional cap of $120,000 per year (or $360,000 under bring-forward), converting a $500,000 taxable component would take 2-5 years depending on your bring-forward eligibility. The strategy requires patience and careful tracking of contribution caps.

Does a recontribution strategy affect my Age Pension?
Yes. Withdrawing super and recontributing it may temporarily reduce your assessable assets if the funds are held outside super. However, once recontributed, the full amount counts as a super asset under the means test. Your Age Pension entitlement may change during the process.

What happens if I exceed the contribution cap during recontribution?
Excess non-concessional contributions are generally required to be withdrawn from super, and you may be taxed at 47% on the earnings on those excess amounts. Careful tracking of your contribution caps is essential. Your adviser should monitor your cap position each financial year.