SMSF trustees and advisers looking to use the changes to contribution rules to create a cash-out and recontribution strategy to reduce the taxable component of a superannuation balance should consider the use of a second SMSF as a holding place for tax-free savings.
BT Financial Group SMSF strategy national manager Neil Sparks said the series of changes to contributions based around bring-forward rules, catch-up and downsizer contributions had created a “contribution nirvana” and consideration had to be given to the tax components of superannuation when cashing out and recontributing.
Speaking at the recent Self-managed Independent Superannuation Funds Association Annual SMSF Forum in Melbourne, Sparks said the bring-forward rules could lead to more SMSF members cashing out and recontributing as every $100,000 of taxable component carried $15,000 to $17,000 of tax when paid to an adult beneficiary as a death benefit.
“It is important to remember when you are cashing out and recontributing, the taxable and tax-free components are set in your account and they are proportional,” he said.
“If you do cash out $330,000 and there’s a taxable component and an exempt component, then you are going to be cashing out in that same proportion.
“If you are recontributing to the same account, you are going to have a problem where every time you recontribute you are increasing the tax-free portion, so the next cash out and recontribution will be taking a higher proportion of the tax-free component as well.”
He said a solution to this is to hold two accounts in separate superannuation funds and that this is particularly relevant for SMSFs as they cannot quarantine accumulation interests.
“If you are cashing out of an SMSF to recontribute to wash away the taxable component, you would want to recontribute that amount into another SMSF or a retail fund so that you can quarantine that tax-free component,” he noted.
“You can then go again and again and again, depending on your age, to get as much of that taxable component into a tax-free component.
“After you’ve successfully done it, you could roll that tax-free benefit back into your SMSF or choose to leave it in your retail super fund.
“If you are in a retail fund, you can have multiple accumulation accounts or multiple pension accounts and if you are taking the contribution from a pension as a lump sum commutation, you can contribute back to accumulation and then refresh the pension again.”
