Superannuation rules changes present estate planning opportunity

Prior to 1 July 2022, a Superannuation member aged 67 to 74 must have satisfied a work test to make a personal contribution to Superannuation. 

This was quite prohibitive for retirees and meant windfalls received later in life were not able to be added to Superannuation.

From 1 July 2022, the work test requirements were removed meaning anyone can now add to Superannuation up to age 74, including 28 days after the end of the month in which they reach 75.

This change presents a great opportunity for retirees, beyond the obvious benefit of adding surplus savings and windfall amounts to Superannuation.  At Muirfield, we have begun implementing a re-contribution strategy for many of our clients.

A re-contribution strategy is used to reduce the taxable component of a Superannuation account while simultaneously increasing the tax-free component.

You might be thinking, isn’t my Superannuation already tax free?  Likely, though the benefit of this strategy isn’t necessarily for the account holder, rather it reduces the tax that may be paid by a non-tax dependant beneficiary of your Superannuation account.  To keep things simple, a non-tax dependant is typically someone who is not your spouse and does not rely on your financially. In most cases, adult children are considered non-tax dependant beneficiaries. 

If you pass away and your Superannuation benefit is paid to a non-tax dependant, tax of up to 15% (plus 2% Medicare Levy) may be charged on the taxable component of your account.

A re-contribution strategy is particularly effective for Superannuation account holders who have a high taxable component and have a non-tax dependent beneficiary for their Superannuation account.  We commonly see this with retiree widows. 

Take John for example.  John is 73 and recently widowed.  He since amended his Superannuation beneficiary nomination in favour of his two adult children.

John’s Superannuation account has the following tax component breakdown.

If paid in its current state, his children may pay a Superannuation Death Benefits Tax of up to $38,930. ($229,000 * 17% tax = $38,930)

By withdrawing and re-contributing his entire Superannuation balance, John is able to create an entirely tax-free benefit for his adult children. 

A re-contribution strategy is a great example of retaining wealth within the family. However, it’s important that your individual circumstances are considered. There are a number of elements that need to be considered before implementing this strategy including:

• Impact on Centrelink benefits
• Capital gains tax upon selling investments
• Transaction costs to sell and repurchase investments
• Superannuation access restrictions
• Superannuation contribution caps
• Total Superannuation Balance and Transfer Balance Cap

If you would like to understand how this may relate to your circumstances, we encourage you to contact your adviser.