Opinion piece written by John Maroney, CEO, SMSF Association
First published in Financial Review on 10 August 2022. Licensed by Copyright Agency.
Recontribution tactics made possible by rule changes are a game changer for older Australians and their families.
The 2021 federal budget introduced sweeping changes to superannuation, most of which have become law. Two changes – removing the work test requirement for non-concessional super contributions for people between 67 and 75 and extending the eligibility for individuals under 75 to make non-concessional contributions using the bring-forward rules – are rewriting the rule book for recontribution strategies relating to estate planning and spouse equalisation.
First, the changes. Under the old rules, the bring-forward arrangements were available only to individuals aged 67 or less. That has been extended to those aged 74 or less on July 1 of a financial year. But no other eligibility requirements to access the bring-forward arrangements have changed.
It means individuals must have a total superannuation balance at the previous June 30 of less than $1.48 million to be eligible for a three-year bring-forward period and can contribute up to $330,000 of non-concessional contributions. Those with balances between $1.48 million and $1.59 million are eligible for a two-year bring-forward period and can contribute up to $220,000 of non-concessional contributions. Individuals with balances between $1.59 million and $1.7 million cannot use the bring-forward rule but can still contribute up to $110,000.
Regarding changes to the work test requirement, it means those aged 67-74 no longer need to meet a work test to be able to contribute to super. Also, there continues to be no work test requirement to receive Super Guarantee or award contributions.
But there is a small catch. For individuals wanting to claim a tax deduction for their personal super contributions, there is no change to the work test definition. This means individuals must work at least 40 hours in 30 consecutive days in the financial year the contribution is made to be able to claim a tax deduction for their personal contribution.
So why are these two changes having such an impact? In simple terms, a recontribution strategy involves a member withdrawing a tax-free amount from their super account, and then recontributing it to their super account as a non-concessional contribution. It typically involves withdrawing an amount from super that comprises a taxable component, or a proportionate amount of taxable and tax-free amount, and then recontributing it as a non-concessional contribution. The result is the taxable component is converted to a tax-free component.
With the work test no longer being a barrier for individuals aged 67-75 making a non-concessional contribution, it means many can use this strategy.
Helping adult kids
Although the taxable and tax-free status of your super benefit may not matter much if you are over 60 (as a lump sum or super pension paid to you after 60 is typically tax-free), it does matter on your death. That’s because super death benefits that are paid to a non-tax dependant (such as an adult, non-financially dependent child), are subject to tax, with tax being deducted from the taxable component of your benefit.
As a recontribution strategy reduces the proportion of your benefit that is classified as a taxable component and increases the proportion that is classified as a tax-free component, it has the effect of reducing the tax that may otherwise be payable when the benefit is paid to a non-tax dependant.