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The re-contribution strategy involves withdrawing some or all of your superannuation balance and re-contributing the amount as a non-concessional contribution. Non-concessional contributions form part of the tax-free component of your super fund. This strategy means that you may be able to convert some or all of your existing taxable component into tax-free component.
To implement this strategy, you need to be eligible to withdraw a lump sum from superannuation. This means you must have either met a full condition of release (such as retirement) or you have unrestricted non-preserved money already in your account.
To enable you to re-contribute the money, you must be eligible to contribute to superannuation which generally means you need to either be:
The work test requires that you have worked at least 40 hours over a consecutive 30 day period in the financial year the contribution is made. The work test exemption provides a one-year relief from the work test for recent retirees. It is available:
If your superannuation fund includes both taxable and tax-free components, the withdrawal will be proportionally drawn from both components. For example, if your tax-free component makes up 20% of your account balance prior to withdrawal, then 20% of any withdrawal is tax-free component and 80% is from the taxable component.
If you are over age 60, you are not liable to pay tax on either component if you’re the member of a taxed fund. You’re only liable for tax on a withdrawal if you are in an unfunded (untaxed) superannuation scheme.
If you are between the preservation age and 60 you’re entitled to the ‘low-rate cap’. This is a lifetime amount that you may withdraw from the taxable component of your superannuation, without paying tax.
The re-contribution strategy is generally most effective if the taxable component included in the withdrawal does not exceed the low rate cap (as no lump sum tax will be payable), or if you’re over age 60 and not liable for tax on the withdrawal.
If tax is payable, your superannuation fund may withhold lump sum tax from the withdrawal at the following rates:
| Your age | Tax component | Maximum tax rate | |
|---|---|---|---|
| Between preservation age and age 60 | Tax-free component | 0% | |
| Taxable (taxed) component | Up to $225,000 | 0% | |
| Over $225,000 | 15% | ||
| 60 or over | Tax free and taxable (taxed) | 0% | |
Note: Low rate cap applicable for FY 2020/21. ^Plus 2% Medicare Levy.
Taxable components received under age 60 must be included in your tax return regardless of whether tax is payable or not. A tax offset will be applied to reduce the tax payable to no more than the rates above. However, as this amount is included in your income for the year, it may impact eligibility for other Government benefits and concessions, and calculation of liabilities that are based on your taxable income.
After you have made the withdrawal, you need to re-contribute that amount back into your superannuation account as a non-concessional contribution (NCC). It is important to ensure this amount does not cause your non-concessional contribution cap to be exceeded.
You must have a ‘total superannuation balance’ (including all accumulation and pension accounts) of less than $1.6 million (current for the 2020/21 financial year) at the prior 30 June to be eligible to make any NCCs the following year.
If you are under age 65 on the 1st of July and your total superannuation balance is less than $1.4 million, you may be able to bring forward up to two years of non-concessional contributions, enabling you to make a larger contribution sooner.
If you make the maximum bring forward contribution in a single year for example, you’re not eligible to make any further non-concessional contributions in the next two years. However, if you trigger the bring forward rule in a year, but don’t fully utilise the maximum available non-concessional cap in that year, the remaining balance may be contributed in either the next financial year, or the year after.
Once you trigger the bring-forward rule, within your 2 or 3 year bring-forward period, to make any further contributions, you must continue to be eligible to contribute to superannuation and your total superannuation balance will need to stay below the ‘general transfer balance cap’ ($1.6m in 2020/21 and may be indexed in the future) each 30 June to entitle you to make any additional contributions in a later year. Other eligibility requirements (such as the work test) must also be satisfied.
The maximum amount you can contribute as a non-concessional contribution, including under the bring forward rule, reduces if your total superannuation balance is more than $1.4 million on the 30 June prior to the financial year in which you trigger the bring forward rule. These rules are complex so it is important that you get advice to help you understand how the rules will apply to you.
Mark (aged 74, turning 75 in August 2022) has $500,000 in superannuation. The amount consists of 70% taxable ($350,000) and 30% tax-free ($150,000) components. Mark retired five years ago and has been unable to make personal superannuation contributions since, due to being unable to meet the work test. He is single with no financial dependents.
Mark has made a superannuation death benefit nomination to his non-dependent son, Matthew. If Mark was to pass away, Matthew would receive the superannuation death benefit payment as a lump sum. When the lump sum is paid, the tax-free component of $150,000 would be paid to Matthew free of tax. However, he would pay 17% ($59,500) in tax and Medicare levy combined on the amount of $350,000 paid from the taxable component.
If Mark implements a cash out re-contribution strategy of $330,000, he could potentially reduce Matthew’s tax liability from $59,500 to $20,230.
The strategy must be implemented between 1 July, 2022 and 28 September, 2022. This is because Mark is turning age 75 in August 2022 and as such, he is able to make the contribution within 28 days after the end of the month in which he turned 75. This makes the deadline for Mark’s contribution 28 September, 2022.
When the lump sum of $330,000 is withdrawn from Mark’s superannuation, the amount will be paid in the same proportion as current components, that being 70% from the taxable component and 30% from the tax-free component.
When the same amount is contributed back to Mark’s superannuation, it will be added to the tax-free component. By implementing the strategy before turning age 75, Mark will be able to reduce the taxable component and increase the tax-free component of his superannuation interest as follows:
| Member - Mark | Taxable component | Tax-free component | Tax payable upon Mark's death (incl. Medicare Levy) |
|---|---|---|---|
| Superannuation balance | $350,000 - 70% | $150,000 - 30% | $59,000 $350,000 @ 17% |
| Total Super balance | $500,000 | ||
| Lump sum withdrawal of $330,000 (July 2022) | $231,000 - 70% | $99,000 - 30% | |
| Total withdrawn | $330,000 | ||
| Tax components after withdrawal | $119,000 | $51,000 | |
| Total super balance after withdrawal | $170,000 | ||
| Re-contribution of $330,000 | $0 | $330,000 | |
| Total super balance after the re-contribution | $119,000 - 23.8% | $381,000 ($231,000 + $150,000) - 76.2% | $20,230 - $119,000 @ 17% |
| Total super balance | $500,000 |
These may include: