A technical specialist has cautioned SMSF trustees against relying on recontribution strategies as this may be not be the most effective approach when attempting to minimise tax liabilities, particularly for younger members and adult children of trustees.
SuperConcepts SMSF technical and private wealth executive manager Graeme Colley suggested that while recontribution strategies can be worthwhile in certain cases, such as in the event of the death of a trustee, they may offer limited benefits compared to alternative strategies in more conventional circumstances.
“From a planning point of view, you really need to talk to your clients if they want to use the recontribution strategy,” Colley told attendees at a SuperConcepts technical webinar today.
“While [a recontribution strategy] reduces the tax payable on death benefits received by adult children, the ultimate question is: Are adult children going to benefit from the death of one or both of their parents?
“The clients also need to think about the benefit that it may provide, particularly where you’ve got members of a couple and they’re both getting on a little bit.
“In those cases a recontribution strategy may be worthwhile, but for younger people a recontribution strategy may not provide any benefit at all.”
He gave an example where one member of a couple passes away and the surviving member draws down a death benefit pension as being a case where a recontribution strategy would be “going through the motions” without any advantage, particularly where the surviving member draws down all the death benefits.
“You need to get your clients to think about whether a recontribution strategy is of any use if they take all the money out of their superannuation fund. We have clients that do that because by investing in their own name they are saving the costs of the SMSF and may end up paying no personal income tax anyway,” he said.
He further noted the effectiveness of a recontribution strategy varied based on the trustee’s specific circumstances, including their account balance and intentions regarding withdrawals and recontributions.
“Now [with] larger amounts and different proportions, where you’ve got a taxable component equal to 100 per cent of the benefit as we see with some clients, this is going to have a huge impact. It just depends on the proportion of the amount withdrawn compared to the total balance in the pension phase,” he said.
“For example, if you’ve got $1.7 million in pension phase and you’re going to draw down $330,000 for recontribution purposes, it’s going to have less of an impact, compared to a pension where the drawdown amount is pretty close to the balance of that pension.”