Re-contributions before turning 60

Superannuation strategies for SMSF trustees.

Under this strategy a person withdraws the maximum tax-free amount they can from superannuation and then recontributes it as a non-concessional contribution. This strategy applies to someone under 60, who wants to retire and produce an income from a superannuation fund, and has little to no tax-free benefits.

By making a large non-concessional contribution the tax free percentage of the member's superannuation increases. The tax-free portion is equal to the percentage that the tax-free benefits are of the total value of the member's superannuation.

This is important for someone under 60 as any taxable pension income they receive will be taxed. By increasing the tax free percentage this means a greater proportion of the pension received will not be taxed.

Example of how the strategy works

The tax effectiveness of the re-contribution strategy for someone under 60 is best illustrated by the experience of Agatha Marple. After turning 55, she has $600,000 in superannuation and has decided to retire. Agatha will receive $20,000 a year in royalty income and has worked out she needs to receive an account-based pension of $50,000. If she did nothing her tax position would be as follows:

 

$

$

Super Pension and Royalty

 

70,000

Tax payable including Medicare levy

15,697

 

Less super pension rebate

 7,500

 

Less net tax payable

 

 8,197

After-tax pension received

 

61,803

If Agatha, instead of starting the pension immediately, took her maximum tax-free lump sum of $195,000 and then re-contributed it as a non-concessional contribution, 32.5 per cent of her superannuation benefits would be tax-free benefits, as follows:

 

$

%

Taxable benefits

405,000

67.5

Tax-free benefits

195,000

32.5

Total super

600,000

100

If Agatha took the same pension of $50,000 this would be her tax result:

 

$

$

Pension

 

50,000

Less 32.5 per cent tax-free component

 

16,250

Taxable pension

 

33,750

Royalties

 

20,000

Taxable Income

 

53,750

Tax payableincluding Medicare levy

9,897

 

Less super pension rebate

5,062

 

  LITO

 194

 

Net tax payable

 

 4,641

After-tax pension and royalties received

 

65,359

This re-contribution strategy provides the greatest benefit for people with higher superannuation benefits and larger superannuation pensions being paid. The strategy becomes more valuable to a person under 60 with other sources of taxable income.

Documentation and Actions Required

  1. Letter from member to trustee/s of SMSF that they have met condition of release and that they want a lump sum payment up to their maximum tax free limit.
  2. Resolution by trustee/s stating request for lump sum has been received and that payment will be made.
  3. Letter from trustee/s to member advising of payment of requested lump sum.
  4. Letter from member enclosing non-concessional contribution and requesting that an account based pension commence.
  5. Resolution by trustee/s acknowledging receipt of non-concessional contribution and stating request for an account based pension has been approved.
  6. Letter from trustee/s to member advising that account based pension will be paid and its components.
  7. Trustee/s complete ATO documentation to register for PAYG withholding tax.
  8. Trustees calculate PAYG withholding to be deducted and set up regular payment direct from SMSF bank account.
  9. Once a quarter complete PAYG withholding statement paying amount withheld to ATO.

Warning

Care must be taken when implementing this strategy if investments have to be sold to fund a lump sum payout. To minimise any capital gains tax payable a pension should be started, all investments needed to fund the lump sum payout are sold while the fund is in pension phase and not paying income tax, convert the fund back to accumulation, and then payout the lump sum.

The amount that can be re-contributed as a non-concessional contribution cannot exceed the limits set. Currently if you are under 65 they are $180,000 a year or, if you have not exceeded this limit in the previous three years, you can contribute up to $50,000. If you are over 64, under 75, and meet the work test, the limit is $180,000 a year. From July 1, 2017 the maximum limits will decrease to $100,000 for one year and $300,000 if the bring forward rule can be used.

Before using this strategy you should seek professional advice as to whe4ther you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

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