A re-contribution strategy involves withdrawing a lump sum from your super fund, paying any necessary tax on the withdrawal and re-contributing these funds back into super as a non-concessional (after-tax) contribution.
The revised superannuation balance will potentially consist of all, or more, tax-free component, which may ultimately reduce the tax payable when funds are withdrawn my a member or paid to beneficiaries upon death.
This opportunity may best arise between ages 60-65 when members can draw superannuation out without incurring tax, and still have the ability to meet the contribution rules.
To determine the validity of a re-contribution strategy, it is important to understand if your superannuation benefits are categorised as tax-free and/or taxable components.
- Tax-free components
The tax-free component of your super balance is generally the contributions on which you have already paid tax, so you don’t pay tax on them again when they are withdrawn. Tax-free components include your non-concessional (after-tax) contributions.
- Taxable components
The taxable components of your super balance are generally your concessional (pre-tax) contributions such as super guarantee (employer contributions) and salary sacrifice contributions.
Ultimately, you want your super balance to have a high tax-free component and a lower taxable components to reduce the potential tax payable when your super is paid out of your super fund upon a condition of release being met.
Disadvantages of a re-contribution strategy
- This strategy may cause your assessable and taxable income to increase for a particular financial year. A higher assessable income and taxable income may lead you to pay more tax.
- You also may be liable to pay tax on the lump sum withdrawal from superannuation if you are aged below 60.
- When re-contributing, any amount that is in excess of the non-concessional cap will incur a penalty tax. The non-concessional (after-tax) contribution cap is $100,000 in 2020-21 or $300,000 if you are eligible to use a bring-forward arrangement.
- Withdrawing a lump sum and re-contributing into your super account could affect both your total super balance (TSB) and transfer balance cap. As at 30 June 2021, your TSB needs to be under $1.6 million to make a non-concessional contribution.
Author: Jesper Lim