Withdrawal and recontribution strategies are not classed as tax avoidance under current laws but such a strategy involving very large amounts of money would fall under wider tax provisions and represent an abuse of the contribution rules, BT technical consultant Matt Manning has pointed out.
Addressing key issues raised by advisers with the BT technical services team in 2025, he noted withdrawals from super are proportioned between a fund member’s tax-free and taxable component and while non-concessional contributions (NCC) form part of the tax-free component, the law doesn’t specify from which component an excess NCC is released.
As a result he noted this could lead to very aggressive recontribution strategies which he did not recommend and viewed as tax avoidance.
To illustrate his point he gave an example of Michelle who has $5 million in an SMSF with a 60 per cent taxable component, and following the sale of an investment property, will make an NCC to her fund of $5 million.
“Why on earth is she doing this? It comes back to the 60 per cent taxable component and Michelle could make a personal NCC she knows will be grossly excessive,” Manning said late last year.
“The law doesn’t say she has to be proportioned in releasing that amount so she’s going to release that $5 million from the taxable component, and her fund would be left with $5 million, minus whatever the small interest penalty is, that is 100 per cent tax free.”
He highlighted, in 2004, the ATO clarified straight-forward recontribution strategies would not come under the anti-avoidance provisions in tax law if the recontribution was used to commence an income stream or made to another fund or to a spouse.
However, he also noted the Part IVA provisions of the Income Tax Assessment Act would apply to any action if carried out for the sole or dominant purpose of avoiding tax.
“What I would say about this example is it is certainly a contrived arrangement. There is absolutely no justification whatsoever for making a $5 million contribution. It’s grossly excessive,” Manning explained.
“The only reason why you are doing that is so that you can take $5 million back out again and then essentially wipe the taxable component, and we are not talking about small beer here, because with $5 million, 60 per cent of that is $3 million, and there is also a $450,000 death benefits tax saving.
“This is one of the example that is definitely tax avoidance, and you can say ‘we’re following the law to the absolute [letter]’ but it’s still going to be covered by those tax avoidance provisions, and [as for} the ATO’s safe harbour for recontribution strategies, I don’t think anyone’s going to say that applies to this situation,” he concluded.
