When approaching retirement, there is consideration for having two superannuation funds as a means of mitigating any unintended tax consequences to your estate. Complications can arise in particular where there is a non-tax dependent, and can be mitigated by implementing a re-contribution strategy.
Conventional wisdom states that having a single super fund makes sense as a means of simplifying your affairs and saving on fees; however, when approaching your retirement, this is not necessarily always wise, particularly when making both concessional and non-concessional contributions.
Throughout our lifetime, we receive contributions or make extra contributions to our super fund as a salary sacrifice or personal deductible contribution. These types of contributions count towards the concessional contribution cap and form part of the taxable component. When approaching retirement, it is worthwhile considering making non-concessional contributions, considering the tax advantages of having your assets structured within an account-based pension. In the event of a passing, superannuation benefits paid to a non-tax dependent (i.e. adult child) – the taxable component is subject to a 15% tax when proceeds are being paid.
The risk of amalgamating both the concessional contribution and the non-concessional contributions is that the components mix, which may hinder the ability to completely erode the taxable component over the long term. In this case, when making lump sum withdrawals from an account, the components are apportioned per the amount withdrawn.
By segregating the tax-free and taxable components in separate accounts, an investor can directly withdraw from the account with the highest taxable component and directly recontribute it into the account which has a tax-free component.
Case Study
Roger (70) has $500,000 in his superannuation account, all of which is 100% taxable. Outside his super, he has $400,000 of cash. Roger’s wife previously passed away, and now he lives by himself and has one financially independent adult son.
The strategy is to maximise his superannuation benefits and establish an account-based pension where he can draw an income to fund his retirement objective of $60,000/a. The initial timing of the contributions looks like:
FY 24/25
Super Fund A: $500,000 (100% Taxable)
Super Fund B: $360,000 (100% Tax Free – Non-concessional Contribution)
In the Financial Year 2027/28, Roger is eligible take make non-concessional contributions to super again.
Assuming the balances remain constant, his ‘re-contribution’ strategy looks like:
Super Fund A: $500,000
Less : $120,000
Total = $380,000 (100% taxable)
Super Fund B: $360,000
Plus : $120,000
Total = $480,000 (tax-free)
This process is repeated the following year but utilizes the non-concessional bring-forward provisions. The outcome is that the client has $840,000 in his super with 100% tax-free. And, when Roger were to pass away his superannuation proceeds would not be liable to any taxes paid to an adult child.
The alternative is that had he not made the re-contribution and kept his superannuation ‘as it was’, $500,000 would be retained in the taxable component. Which upon Roger’s passing would be subject to a ‘death tax’ of $75,000 – leaving his son worse off.
There are several factors to consider with such a strategy, being the total superannuation balance, age, contribution caps and your overall estate planning objectives. Partnering with an advisor can help structure your affairs in a proactive manner to mitigate any unintended tax consequences upon your estate and get the most out of our superannuation.
