1 July 2021 (updated annually)
A re-contribution strategy is a withdrawal of your superannuation benefits and a re-contribution back into super.
Superannuation benefits are categorised into tax-free and taxable components depending on how the original contributions were made into the fund. Lump sum withdrawals from superannuation must be made in accordance with the proportioning rules, that is, proportionate amounts drawn from taxable and tax-free components. There is no tax payable on tax-free components.
A re-contribution strategy involves withdrawing a lump sum after a condition of release is met, paying any necessary tax on the withdrawal and re-contributing these funds into superannuation as a non-concessional contribution. The revised superannuation balance will potentially consist of all, or more, tax-free component.
A great reason to implement a re-contribution strategy is tax; this strategy converts all or part of the taxable portion of your superannuation benefit into a tax-free component. Ultimately, this may result in a reduction of the potential tax payable if your super is passed onto certain beneficiaries following your death.
This strategy can only be implemented if you are able to meet a condition of release to access your superannuation benefits and also eligible to make a contribution into superannuation.
The strategy is effective under the following circumstances:
Income tax perspective: A re-contribution is still beneficial for those aged between preservation age (from age 58) and age 60 and who are expecting to receive a superannuation income stream.
Estate planning perspective: This strategy can also be utilised where there is some likelihood that your superannuation benefits will be received by those not considered to be dependants under taxation law, such as adult children. A re-contribution can reduce the lump sum tax payable from death benefit proceeds, or in some cases, the adult beneficiaries will not be required to pay any tax at all (see table of tax rates below).
The following table illustrates the tax rates applicable when superannuation death benefits are paid as a lump sum.
|Recipient||Superannuation component||Tax treatment|
|Tax dependent (eg a spouse, children under 18, someone financially dependent on the deceased person)||Tax-free||No tax payable|
|Taxable (taxed and untaxed elements)||No tax payable|
|Non-tax dependant (eg children 18 and over)||Tax-free||No tax payable|
|Taxable (taxed element)||Up to 17%1|
|Taxable (untaxed element)||Up to 32%1|
1 includes Medicare levy of 2 per cent. Where the benefit is paid through your deceased estate, t he executor or administrator of your estate pays the tax and Medicare levy is not payable.
John, 59, has $400,000 in his super fund with $200,000 tax-free and $200,000 taxable component. Assuming he is eligible to withdraw his superannuation balance, and his total superannuation balance last 30 June was less then $1.48 million, he could proportionally withdraw $330,000 from his superannuation as follows:
|Tax components||Tax implications|
|$165,000 tax-free component (50%)||Tax-free|
|$165,000 taxable component (50%)||Tax-free up to $225,000 of taxable component (low-rate cap for 2021/22)|
|$330,000 total super||Nil tax payable|
As John is eligible to re-contribute the full $330,000 into super, his revised superannuation balance will consist of 91.25 per cent tax-free component, rather than the original 50 per cent, as follows:
|Tax-free component||Taxable component|
|Initial superannuation balance||$200,000||$200,000|
|Balance in fund||$35,000||$35,000|
|Add re-contributed amount||$300,000||$0|
|Balance after re-contribution||$365,000||$35,000|
Re-contribution may be more beneficial if you are aged between 60 and 65 as superannuation benefits are tax-free (regardless of the tax components). You can then make a non-concessional contribution up to $110,000 per annum (2021/22) or up to $330,000 averaged over a three year period whilst you are under age 67 (subject to your total superannuation balance last 30 June).