New strategic tax opportunities to impact SMSF recontribution implementation

Ms Sanderson noted that from a death benefits perspective, recontribution can be an effective way to manage the tax components of the fund; however, advisers will need to weigh the practical implications and implementation to get the full benefits of the strategy.

This would include making sure there are no adverse taxation implications of withdrawing the money from superannuation, and when the contribution limits are appropriately considered, as any amount recontributed to superannuation would be a non-concessional contribution and therefore subject to the caps.

“There are preferences to always maximise the money that you have outside super into super first and use your contribution caps from that perspective rather than withdrawing money out to then use your contribution caps to get back in,” Ms Sanderson said.

“If you’ve maximised everything outside super, then you might consider looking at a withdrawal and recontribution strategy.

“Generally, you don’t want to take money out that you can’t put back in, you would only want to take out an amount up to your non-concessional cap.”

Another factor SMSFs need to consider is the need to overlay the total super balance thresholds.

If the SMSF’s total super balance at 30 June 2021 was over $1.7 million, Ms Sanderson noted that even if the member took out $330,000 today, it won’t be able to recontribute that back in this financial year.

“This is because at 30 June 2021, the member will be over the $1.7 million cap, so you have to make sure that you overlay that with this as well,” she said.

“For those people under 60, so between preservation age and 60, if someone wants to do a withdrawal and recontribution strategy, they will need to consider that whatever they take out of the fund, they don’t want to be paying tax on.

“For those under 60, you’ve got amounts up to your low rate cap that you can take out tax-free, but above that, the taxable component, it is going to be taxed at 17 per cent, so just watch out for that from that perspective and think about the purpose of employing a withdrawal and recontribution strategy.”

Ms Sanderson noted that if the purpose is to perhaps manage the death benefits tax position, funds don’t want to be in the situation where whatever is taken out of the fund is used to pay tax on for the benefit of the children.

“Be mindful of what you can put back into the fund, how the contribution cap overlays the total super balance, but also if there are any tax implications of taking money out of the fund and just to be really mindful of how that works,” she said.

Bring-forward considerations 

With the extension of the bring-forward period in the current year to age 67, Ms Sanderson said that the changes can be of substantial benefit to implementing a withdrawal and recontribution strategy over a period of time, but advisers will need to be alert on emerging risks.

This includes getting the timing wrong in terms of leading up to age 67 and triggering bring-forward periods inadvertently (under the current non-concessional contribution provisions — proposed to change from 1 July 2022.)

Furthermore, contributing the funds prior to a pension being commenced with the remaining accumulation balance, as the benefits would be aggregated from a proportioning rule perspective which then defeats some of the purpose of undertaking the strategy.

“The consideration here is also looking at where you take the money from. In order to employ a withdrawal and recontribution strategy at this time of the year, your total super balance needs to be within those thresholds. So, under $1.48 million,” she noted.

“The other thing to consider is how you treat the withdrawal out of the fund. Is it additional pension payments, a lump sum from accumulation or is it a partial commutation from your pension?

“You need to overlay the preservation side of things to this as well, but also if you were to take out $330,000 from your account, how would that be treated from a transfer balance cap perspective when you put money back in and then you wanted to start a new pension with that money — we need to be really quite careful about how all of that works.”

The other consideration is assessing changes to assets because if the super fund is fully invested in shares and managed funds or property, actually implementing one of these strategies can be a real challenge.

“The easiest way to do it is cash out, cash in. If I was to encounter a client where they were super keen to do this but it was fully invested, I would almost counsel them against it because doing off-market transfer forms for all of the investments or liquidating them is not the preferred outcome,” Ms Sanderson continued.

“If there is insufficient cash available, you may need to consider a lump-sum payment, provided a lump sum can be paid; the member could be in transition to retirement phase and therefore ineligible to take out a lump sum. Alternatively, you could look at multiple cash transfers. However, this does require additional administration which may not be able to be easily processed, depending on the software system and administrator.”

This comes as the current changes to the bring-forward rules, along with further proposed changes announced in the federal budget, may see increased adoption of withdrawal and contribution strategies for SMSFs.