In the wake of the Government's fifth Budget, we’ve highlighted some of the major changes that you need to be aware of and account for during the year ahead.
By Richard Felice - Financial Adviser
Super benefits are made up of tax-free and taxable components. These components are characterised by the way contributions have been made into the account. For example, after-tax contributions will be added to the tax-free component, while salary sacrifice contributions or contributions made by your employer will be added to the taxable component.
In the event of your death, if your super benefits are passed on to a ‘non-dependant’, such as an adult child, then the taxable component of the benefit is taxed at 16.5%. This can result in a fairly significant tax bill, which ultimately reduces the final benefit. Tax-free components generally remain tax-free to any beneficiary.
Boost tax-free components
A strategy to minimise this tax when leaving super benefits to non-dependants is to boost the tax-free component of a benefit, or replace taxable components with tax-free components.
A re-contribution strategy involves the withdrawal of a lump sum from your superannuation which you then re-contribute back into your super. You take it out and you put it back in again. By doing so, you are able to convert taxable components to tax-free components over time. This may help you to withdraw a higher level of income or capital tax-free, but will also minimise the tax payable on a superannuation death benefit received by non-dependants.
Passing on retirement savings to adult children is of course a common theme and so, not surprisingly, a re-contribution strategy appeals to a significant number of our clients at Countplus mbt. If this is also of interest to you, it’s important to note that for a re-contribution strategy you must meet two main conditions. Firstly, you must satisfy a condition of release which includes retirement at preservation age, which is currently age 55.
Secondly, you must be eligible to contribute to superannuation. While you are younger than 65, you can contribute but you don’t have to be working. However, if you are over 65 years of age and under 75, the eligibility criteria is tougher.
Spouse contributions
Another benefit of a re-contribution strategy is that instead of withdrawing and re-contributing amounts to your own superannuation fund, you could re-contribute a portion of the withdrawn funds into your spouse's superannuation fund as a spouse contribution. This can allow you to equalise your superannuation account balances and take advantage of two non-concessional contribution caps, which includes spouse contributions.
If you you’d like to explore the use of a re-contribution strategy, please get in touch with me and the financial planning team here at Countplus mbt. We'll see if you’re eligible to adopt this strategy to minimise the tax payable by you upon retirement, or to your beneficiaries later on.