When handled the right way, utilising a re-contribution strategy can help save a taxpayer’s adult children thousands of dollars in tax.
Individuals with a self-managed super fund (SMSF) can reduce the possible tax on their estate in the future by starting a transition to retirement pension by taking the maximum 10 per cent pension payment and re-contributing it back into super as a non-concessional contribution.
When a person is over 60 and drawing a transition-to retirement pension, they do not have to pay tax on withdrawals, capital gains or earnings tax.
They can withdraw between 4 and 10 per cent of their account balance each year (either at the commencement or on July 1) under the transition to retirement (TTR) regulations. The additional extra non-concessional contributions can go back into the fund (limited to $180,000 or, for those under the age of 65, $540,000 using the three-year averaging provisions).
The non-concessional contributions enter the fund as non-taxable contributions and remain non-taxable if the person passes away and their funds are passed on to non-dependent beneficiaries like adult children. Dependents such as a person’s spouse, children or dependent adults would receive the funds free of tax in any case.
Even though the taxable component of an SMSF fund will always be taxable to non-dependents, the SMSF trustee can reduce the taxable component by withdrawing (where legally possible) and re-contributing the amount back into the fund.
Another option to reduce the possible tax on a person’s estate in the future is to withdraw $195,000 tax-free (and then re-contribute it) if the person is under the age of 60 and has attained a condition of release, e.g. retirement. Since most people are unaware of this possibility, it is seldom used.