Re-contribution strategies vital for ‘future-proofing’
While re-contributions have long been used for estate planning purposes, they could now be important for protecting against future taxes imposed by the government and evening up balances, says a technical expert.
Speaking at an industry event, Heffron SMSF Solutions head of customer Meg Heffron explained that re-contribution strategies, which involve converting money that’s always been taxable in super into non-concessional contributions that are tax-free, have become more attractive with the super reforms.
Traditionally, she said, this strategy has typically been used for estate planning purposes, so that an “adult child that pays tax can inherit a super balance that’s tax-free, rather than a super balance that’s taxable”.
However, Ms Heffron said this strategy could also be very important in protecting against future taxes imposed by the government.
“For the last 10 years, we’ve had the luxury of being able to think that super is tax-free eventually for everybody. I reckon that’ll change one day, it obviously didn’t change this time, but maybe in the next round of changes it will,” she said.
“My thinking is tax-free money is unlikely to be taxed, whereas taxable is more likely to be, so I see re-contributions as a bit of a future-proofing exercise.”
Re-contributions will also be very useful for making the most out of the $1.6 million transfer balance cap, she said.
“For example, if you had one member with $2 million who is 60, and another member who is also 60 but has a much lower balance, and let’s imagine you’ve got plenty of time to make contributions for member two, you’d look at that and decide that in the new world, it’s much better to even up those balances,” she explained.
“Otherwise, when member one eventually gets to the point where they’re taking a pension they’ll be over $1.6 million, and we’ve wasted member two’s $1.6 million.”
In this couple, Ms Heffron said the member with the larger balance could take a TRIS and re-contribute the money for the member with the smaller balance.
“If we don’t do anything, however, they’ll get to 65 in five years’ time, the two balances will still be very out of whack and about 25 per cent of the fund will have to stay in accumulation phase because it’ll be over the $1.6 million cap,” she said.
“If we did something as simple as start a TRIS with some or all of the larger member’s balance and re-contributed it for the person with the smaller balance, we end up with very little in accumulation phase.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.