Superannuation Recontribution Strategy: A Smart Move to reduce taxes on Inheritance
In recent years, an increasing number of older Australians have been leveraging a strategy known as superannuation recontribution, which can help reduce taxes on inheritances for their children. This approach has become more popular since a 2022 change in the law, allowing Australians aged 67 to 75 to make contributions to their superannuation without having to meet the work test.
This strategy involves withdrawing funds from a superannuation account and then recontributing the money as a non-concessional (after-tax) contribution. By doing so, it effectively converts the taxable component of the super into a tax-free portion, which can be passed on to beneficiaries without the usual 15% tax liability. While this creates a financial advantage for the beneficiaries, it also means the government loses some revenue it would otherwise collect from the inheritance tax on super.
The opportunity has caught the attention of many Australians who have not yet spent all their superannuation and are looking to safeguard their children from potential tax burdens.
For individuals with significant super balances, this strategy can significantly reduce the tax liabilities on inheritance, offering substantial tax-free benefits.
For example, an individual aged 60 or older can withdraw funds from their super without incurring tax, but to take advantage of the recontribution strategy, they must adhere to the contribution limits, currently set at $120,000 per year. There are also bring-forward rules that allow for contributions of up to $360,000 over three years, which can accelerate the process of converting taxable super into tax-free super.
This strategy works best for those who expect to leave a portion of their super to their children and who are unlikely to spend all their super during their lifetime. It can be particularly useful for individuals who wish to reduce the tax impact on their heirs, especially if they have large super balances.
The superannuation recontribution strategy has gained traction, with a marked increase in contributions from those aged 67 and over since the policy change. In 2022-23, Australians in this age group made up 51% of all non-concessional contributions, with the largest increase seen in those aged over 70. This shift in strategy has led to a significant increase in the total amount being recontributed, from $232 million to $936 million in just one year.
The benefits of this strategy are most notable when applied over several years. For instance, an individual who begins using the recontribution strategy at age 67 and continues until age 75 could significantly reduce the taxable component of their super, potentially leaving their heirs with a much larger, tax-free inheritance.
However, not everyone may benefit from this strategy. Those who expect to fully spend their super or have smaller balances may not find the recontribution strategy worthwhile, as their children may not inherit enough to benefit from the tax reduction.
While the strategy has gained attention for its tax benefits, experts caution that it’s not without its limitations. For those with very large super balances, the strategy can be complicated by contribution caps and restrictions on the total amount that can be held in a super fund. Moreover, it’s important to consider how best to manage the recontributed funds to ensure the tax-free status is preserved.
By taking advantage of the policy change that allows individuals aged 67-75 to make non-concessional contributions, you can potentially convert taxable super into a tax-free asset, providing a significant benefit to their children. However, it is essential to understand the rules and limitations of the strategy, especially regarding contribution caps and eligibility criteria, to fully maximise its potential.