The use of a withdrawal and recontribution strategy should be reassessed as the combination of a series of changes, including those starting on 1 July, may have increased their effectiveness for some SMSF members, according to an SMSF specialist adviser.
Verante Financial Planning director Liam Shorte said: “The withdrawal and recontribution strategy has been popular from both a retirement and estate planning perspective to manage tax outcomes for retired members and beneficiaries on the death of a member.”
Shorte said the strategy should be reassessed in light of a number of reforms that have taken effect from 1 July 2017 to 1 July 2022, including the increase of non-concessional contribution (NCC) caps to $110,000, the indexation to $1.7 million of the total super balance (TSB) cap rule to determine eligibility to make NCCs, the indexation to between $1.6 million and $1.7 million for the transfer balance cap (TBC) and the removal of anti-detriment payments for excess contributions.
He noted the most recent change was central to making the most of the strategy, but SMSF members did have to watch the cap limits that applied.
“From 1 July 2022, [there is] the ability for SMSF members over 67 to continue to make NCC contributions up to age 75. This will help you get the maximum benefit available under the recontribution strategy,” he said in a blog post.
He added the strategy also requires an SMSF member to have met a full condition of release to be eligible to make lump sum withdrawals, but it now had more scope for use by members up to the age of 75.
“The recontribution strategy involves withdrawing an amount from an SMSF member’s balance and making a NCC back into the SMSF in the same or another member’s name. This effectively enables any taxable component of the lump sum withdrawn to be converted into a tax-free component paying nil tax on death benefits,” he said.
“Now, if you are under 75, you do not need to meet the work test eligibility to make NCCs, but you do have to ensure that your total super balance contribution cap limit will allow a recontribution of the funds.”
He noted the indexation of the TSB and TBC to a maximum of $1.7 million could also be factored into a withdrawal and recontribution strategy, particularly where one member was close to or had exceed those limits.
“Recontributions, where one member of a couple makes a withdrawal from their SMSF account and contributes into their spouse’s member account, may become attractive to the extent that it would enable them both to maintain a member account balance of less than $1.7 million, potentially preserving future eligibility to make NCCs,” he said.
He noted this approach was useful where a member of age pension age cashed out some of their superannuation and contributed into the member account of their spouse who is below age pension age.
“This strategy can enable the older spouse to get more age pension as super in the accumulation phase is not means tested when held in the name of a person under age pension age,” he said.
“It can also enable taxable money to be converted into tax-free money and may result in a government co-contribution or spouse tax offset.”
