The most popular strategy used by SMSFs is the recontribution strategy. In simple terms, this involves a member (who meets a condition of release) withdrawing a lump sum from their bank account and recontributing to super.
A recontribution strategy can be used for tax minimisation from an estate planning point of view.
A member balance is typically made up of two types of components, a taxable and a tax-free component. When a taxable component is paid to a dependant beneficiary the amount will be tax free regardless of the component composition. However, when paid to a non-dependant such as an adult child, the recipient will pay an effective tax rate of 17% on the benefit (including medicare levy). This has been referred to by many as the ‘death tax’.
The recontribution strategy can be utilised to reduce the tax non-dependants will pay when they receive the benefit. This effectively ‘recycles’ a member balance to convert the taxable components into tax free components. This involves withdrawing an amount out of the fund and putting it back in. Typically, the withdrawal amount will be the same amount that a member can contribute as a non-concessional contribution.
Another popular strategy we see is the member balancing. This strategy sees a member withdrawing a lump sum from the funds bank account and recontributing it back into the super fund but allocating the contribution to another member which is typically their spouse.
The benefit here, is to take advantage of two Transfer Balance Caps and enable the maximum amount possible to be held in a tax-exempt environment.
There is one strategy, however, that many are not aware of. Most of the time if something sounds too good to be true it generally is but with the following strategy this is not the case. This strategy allows you to “have your cake and eat it too!”.
When contributions are made, they are not recognised until the fund receives the contribution into the fund bank account. Super contributions when received need to be allocated to a member within 28 days from the end of the month that the contribution is made. Therefore, if you make a contribution in June there is a unique opportunity to hold the contribution in an “unallocated members reserve” in the fund as at 30 June.
This provides clients with a unique opportunity to “double dip” on tax deductible contributions and effectively get the benefit of two concessional caps in the one year.
In practical terms this allows a member who may have a high taxable income in a financial year resulting from a capital gains tax event or someone who is planning to retire and will have a significant reduction in their taxable income to get “more bang for their buck” in the year where they can maximise a tax benefit. As the concessional contribution cap is increasing from 1 July 2021 from $25,000 to $27,500 this means that a member may contribute $52,500 in the current year and claim a tax deduction for the whole amount.
To allow this to occur though the following needs to happen:
Clients that are aged 65 or above who have sold their family home during the financial year can benefit from utilising the downsizer contribution. This enables them to contribute up to $300,000 per spouse subject to eligibility criteria. Please note that from 1 July 2022 the government have proposed that this age is reduced to 60 but it is not yet legislated.
Finally, members who have less than $500,000 across all their super funds, who have not fully utilised their prior year Concessional Contribution Caps may be in a position to claim both a tax deduction for future contributions and utilise the catch-up contribution provision for any unused concessional contribution caps in prior years.
Suddenly there could be a significant tax deduction available to members who are in this position especially if they haven’t been making or receiving any concessional contributions from 1 July 2017.
To find out more about this article please contact Karen Dezdjek in our office.
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