This article also appeared in Money Management.
The recent changes introduced to superannuation contribution rules provide increased opportunities for cash out recontribution strategies. While the strategy aims to increase the tax-free portion of superannuation interest, there are important issues for financial advisers to consider. This article provides a summary of:
- the cash out re-contribution strategy;
- potential benefits;
- important points to consider before recommending the strategy.
What are the recent changes to superannuation contribution rules?
In February 2022, The Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 (Bill) passed both houses of Parliament and received Royal Assent. The key superannuation measures in this Bill for individuals aged between 67 and 75 include:
- Changing the work test requirement and extending the non-concessional contribution bring-forward rules effective 1 July 2022.
This means from 1 July 2022, individuals aged between 67 and 75[1] will be able to make non-concessional contributions to superannuation without having to meet the work test. These individuals will also be able to take advantage of the bring-forward arrangements and contribute up to $330,000 to superannuation in a single financial year (subject to their Total Superannuation Balance being below $1.48m on prior 30 June).
This change may open planning opportunities for older Australians including being able to cash out and re-contribute to super and ability to make non-concessional contributions post-age 67 without having to meet the work test.
Cash out re-contribution strategy
The cash out re-contribution strategy involves withdrawing some or all of the superannuation interest and re-contributing the amount as a non-concessional contribution. The amount withdrawn from superannuation is paid to the individual in accordance with proportioning rules, which is in proportion to existing taxable and tax-free components. When re-contributed to superannuation, the amount is allocated to the tax-free component of superannuation interest.
As such, the strategy may potentially convert some or all of the taxable component into a tax-free component. Ultimately, this may result in reduced tax payable if superannuation death benefits are paid to non-tax dependent beneficiaries (eg adult non-dependent children).
Potential benefits of cash out re-contribution strategy
Benefits of the strategy include:
- Increase in the tax-free component of superannuation interest.
- Reduction in tax paid by non-dependent beneficiaries in the event of death.
- If aged between preservation age and age 60, increase in tax-free component resulting in paying less tax on pension payments made prior to age 60.
- Depending on income and other eligibility requirements, once the contribution is made the individual may qualify for Government co-contribution of up to $500.
- Equalising superannuation balances for couples where the amount is withdrawn from one person’s superannuation and contributed into the other person’s superannuation account. By doing so, each person may be able to better manage their individual Transfer Balance Caps or Total Superannuation Balances. This may provide an opportunity to transfer more amount to pension or to make additional superannuation contributions.
- Similarly, where one spouse is younger than the other, by withdrawing an amount from the older person’s superannuation and contributing to the younger person’s superannuation account, the couple may be able to access additional social security benefits while the younger person is below age pension age.
[1] Amounts contributed must be received no later than 28 days after the end of month in which they turned 75.
