Could a Withdrawal and Re-Contribution Strategy Benefit Your Beneficiaries?

Passing superannuation assets to beneficiaries can be a complex task, but by being proactive, you can help to reduce the tax burden on your loved ones. Withdrawing funds from superannuation and contributing these back to your fund is known as a ‘withdrawal and re-contribution strategy’. While this may seem ineffective, the strategy can increase the proportion of your fund that is considered tax-free and thus improve estate planning outcomes for certain beneficiaries.

Understanding your superannuation components

Your superannuation balance comprises both a tax-free and a taxable component. It is important to understand how these components can interact with your estate.

When passing wealth to a dependent (generally a spouse or child under 18), no tax is payable by the recipient. In contrast, for those passing wealth to adult children in their estates, a tax of 17%* may be levied on the taxable component of your superannuation balance.

*Including the Medicare levy
We note that the above table does not include the untaxed element, which is most commonly found in public sector funds. The untaxed element is generally taxed at 32% including the Medicare levy, when paid to non-dependents.

For those over age 60 and retired, superannuation withdrawals are tax free regardless of these tax components. Instead, these tax components are relevant once the account holder has passed away and the funds are transferred to their estate.

How Does the Strategy Work?

A withdrawal and re-contribution strategy aims to re-balance the portion of your superannuation in the tax-free status to help manage (and potentially eliminate) tax paid by select beneficiaries.

To illustrate how an individual can utilise a withdrawal and re-contribution strategy, take the example of Klara, who has $900,000 in superannuation at age 71. Klara’s immediate family (i.e., beneficiaries) consists of her two adult children.

1. Viability Check: The starting point for a withdrawal and re-contribution strategy is understanding the taxable and tax-free components of your superannuation balance. As shown below, Klara has $900,000 in superannuation with 20% of this tax-free and the remaining 80% held as a taxable component.
2. Withdrawal: Klara meets a conditions of release for withdrawing from superannuation and thus elects to have $360,000 paid to her personal bank account. This withdrawal is made on a pro-rata basis from her respective tax-free and taxable components.
3. Re-contribution: Klara meets the criteria to utilise the three-year bring-forward rule, which allows her to make three times the annual non-concessional contribution in a single financial year. This takes her allowable contribution from $120,000 to $360,000.
   

   	Tax-free	Taxable	Total
   Current balance	$180,000 (20%)	$720,000 (80%)	$900,000 (100%)
   Withdrawal	$72,000 (20%)	$288,000 (80%)	$360,000 (100%)
   Post W&R balance	$468,000 (52%)	$432,000 (48%)	$900,000 (100%)

4. Outcomes: On completion of the withdrawal and re-contribution strategy outlined above, Klara’s superannuation balance remains at $900,000. Importantly, the tax-free component of her balance is now $468,000 or 52%. If this wealth is then passed to Klara’s estate to be received by her two adult children, the withdrawal and re-contribution strategy may lead to a $48,960 tax saving for her beneficiaries.
   

   	Without W&R Strategy	With W&R Strategy
   Tax free	$180,000	$468,000
   Taxable	$720,000	$432,000
   Non-dependent tax rate (taxable component)	17%	17%
   Death benefits tax payable	$122,400	$73,440

Overview

As large withdrawals from super are restricted for those still working, it is generally best to wait until you’re retired and over 60 to consider this strategy. This still leaves plenty of time as with increased contribution caps form 1 July 2024, there is now more scope to benefit from this strategy across just a few years. An Evans and Partners financial adviser can help assess your eligibility for withdrawals, contributions, and analysing the tax components of your superannuation fund to ensure you get the most out of this strategy.