Recontribution strategy definition
A recontribution strategy is where a Member withdraws money from their SMSF’s bank account either as a pension withdrawal or as a lump sum and then recontributes it back into the SMSF’s bank account as a Non-Concessional Contribution. This is a common estate planning strategy which aims to change the tax components from taxable to non-taxable. A non-taxable component is more favourable in a Binding Death Benefit Nomination when it is made to non-dependents.
The tax benefits of the recontribution strategy
By implementing a recontribution strategy, a Member can make changes to the underlying tax components of their superannuation balance. Member balances within an SMSF are made up of key tax components and when a Member makes a Non-Concessional Contribution, that amount forms part of the tax-free component.
It’s a better outcome to have a Member balance as a tax-free component when making a binding death benefit nomination to a non-dependent.
Dependents will not pay tax on death benefits received. Examples of dependents are:
- The Member’s children aged under 18
- The Member’s spouse or former spouse
- Individuals who were financially dependent on the Member
- Individuals who had an interdependency relationship with the Member e.g. both the Member and individual relied on each other financially and lived together
How the recontribution strategy works
To implement a recontribution strategy, a Member who meets a condition of release will withdraw money directly from the SMSF’s bank account as a pension payment or lump sum. This can then be added back to the Fund as a Non-Concessional Contribution. The Non-Concessional Contribution cap is $120,000 in one Financial year, however, by utilizing the Bring Forward Rule, a Member can make a $360,000 Non-Concessional Contribution in one Financial Year but will not be able to make a Non-Concessional Contribution for the next two Financial Years.
A Member who has a total superannuation balance of more than $2 million or is aged 75 or over is not allowed to make further Non-Concessional Contributions to their superannuation.
For more guidance on estate planning within an SMSF, please see here.