Superannuation benefits in an SMSF are categorised into tax-free and taxable components. A recontribution strategy works by withdrawing a large sum of superannuation from a member’s fund and a re-contribution of the funds as non-concessional contributions. The updated superannuation balance will contain the same funds yet will be considered a tax-free component.
This strategy can be implemented if you are able to meet a condition of release in order to draw the lump sum and also are eligible to make a contribution back into your super. Recontribution is suitable for those aged between Wealth Matters – Issue 34, 2016 SMSF arm’s length transaction Investing for the long haul 60-65 as withdrawals are tax-free, regardless of the tax components.
Re-contribution can also be beneficial for those under 60 and commencing a retirement income stream as the increasing tax-free component of your income stream allows for a reduced tax payable, consequently increasing your after-tax income.
However, caution must be exercised for individuals aged between 55-59 accessing the scheme as withdrawals may be taxable and are dependent on the components of your superannuation. Using the re-contribution scheme may not affect your marginal tax rate, however, it can affect entitlements to certain tax offsets and concessions.
Ultimately, the re-contribution strategy can be a beneficial way to reduce or eliminate tax from an income tax and estate planning perspective provided members can meet the necessary requirements.