Matt Manning from BT Financial said withdrawals from super are proportioned between the tax-free and taxable component. Standard withdrawals such as pension payments, and non-concessional contributions form part of the tax-free component, and the law doesn’t specify from which component an excess non-concessional contribution is released.
“It just says that the standard proportioning rule doesn’t apply. We’ve then got the broader question of whether re-contribution strategies Part IV A and despite not being mentioned anywhere in the law prohibiting such an action, if you did so for the sole or dominant purpose of avoiding tax, then that’s where Part IV A comes in, and we start looking at tax avoidance, as distinct from tax planning,” he said.
“What constitutes tax avoidance tends to be a much greyer line than what constitutes tax evasion.”
Manning said in 2004 the ATO issued a press release that said it had examined a number of “straightforward strategies” and confirmed they would not attract the general anti avoidance.
“They gave two examples. The first one is that it’s not going to be anti-avoidance if a person withdraws from their super and then re-contributes the same or similar amount shortly afterwards for the purpose of commencing an income stream,” he said.
“The second one is simple variations to the strategy, such as where a person commences the pension or the where the re-contribution is made to another fund or, for example, the spouse’s fund.”
However, Manning said, the ATO continues that it will need to “consider our position if we were to find examples of the arrangements contrived to meet the eligibility requirement in form, but not in substance”.
“So what is a simple re-contribution strategy covered in the ruling versus what isn’t? This example is one of the extreme cases of what certainly isn’t [included]. We have Michelle, who’s a high net worth client. She’s got $5 million in her SMSF, that’s 60 per cent taxable component. In the event of a death, she wants the super to be paid to a non-dependent adult child. She’s recently received proceeds of $5 million for selling an investment property. During 2025-26 she wishes to make a $5 million personal, non-concessional contribution to her SMSF,” Manning continued.
“Why on earth is she doing this? She’s got a significant taxable component. She could, from an administration perspective, make a $5 million personal non-concessional contribution that she knows will be grossly excessive. The law doesn’t say that she has to be proportionate in releasing that amount, so she’s going to release that full $5 million from the taxable component, and therefore her fund would be left with $5 million minus whatever the small interest penalty is, that’s 100 per cent tax free.”
He added that although in this scenario Michelle has used the rules to be able to end up with 100 per cent tax free, it is “grossly excessive” based on not only the amount, but also her total super balance.
“This is certainly a contrived arrangement. There is absolutely no justification whatsoever of making a $5 million contribution. The only reason she would do that is so she can take $5 million out again and then essentially wipe the taxable component,” he said.
“This is one example that’s definitely tax avoidance and certainly not to be touched. Even though you can step through the law and say you’re following it to the absolute T, it’s still going to be covered under that tax avoidance. And the commissioner’s safe harbor, as far as simple re-contribution strategies, would not apply to this situation.
“There is also an ethical bent with standard one about following all laws and not circumventing the law. I think you could argue here, well, we’ll follow the law to the absolute letter, but we certainly circumvented the law.”
