Nick Bruining Q+A: Recontribution strategy can spare your kids a death tax blow when your super is passed on

Question I need a bit of help understanding why my superannuation fund wants to charge me for something I consider to be procedural steps that I should take to achieve a reduction in what is basically a “death tax” on the monies that I am leaving to my children. The fund is looking at what I want to know and is calling it “advice”. It wants to charge me for giving this advice. I am 73 years old and wish to reduce the tax on my bequests to my children on my death. I believe the process is called a recontribution strategy and that it involves taking out an amount from super and then putting it straight back in again. The one piece of information I have gleaned is that once I turn 74 — which will be reasonably soon — the recontribution strategy may no longer be available to me. Answer This is a common and popular strategy that can save your loved ones up to $65,000 in tax when you pass. It is disappointing that your fund wants to charge for “advice”, but if the information varies from asking factual questions about your fund and drifts into “strategies”, that may be why. Recontribution involves withdrawing money from your account and immediately reinjecting it back into super. Your existing super balance includes two components — a taxable portion and an exempt, or tax-free, portion. If part of a death benefit payout, the taxable portion is taxed at 15 per cent and the exempt portion is always tax-free. The recontribution strategy simply boosts the exempt portion because the recontributed amount is a non-concessional contribution, which is the main source of the exempt portion. The effectiveness of the strategy is constrained by the amount we can contribute to super. Normally, and if aged under 75, we make use of the non-concessional bring-forward rules. This allows us to contribute three years’ worth of non-concessional contributions of $120,000 a year — or $360,000 in total. You simply withdraw this amount from super and deposit it into your bank. Because you are over 60, no tax is payable on withdrawal. Note that if you have an existing exempt portion, some of that will be included in the withdrawal. In other words, the super fund must apportion the withdrawal. You cannot “target” the taxable portion alone. Once in your account, you can electronically transfer or BPAY the full $360,000 as a member non-concessional contribution directly back to your accumulation account. If you don’t have an accumulation account, you should be able to open a new one with your super fund online. Check with your bank that you don’t have to temporarily lift the daily transfer limits or it could take weeks to reinject the full $360,000. Question I am 80 years old, and between October 2023 and January 2024 I gifted my children $500,000 from my self-managed superannuation fund, just before I closed it. I am now wondering if I should have notified the Australian Taxation Office? When will I be able to check if I’m eligible for any government benefits? I still have about $620,000 in term deposits. Answer The gifting, or deprivation, rules only apply to Centrelink customers. In simple terms, you cannot deliberately reduce your assets to gain or increase a pension beyond the $10,000-a-year — and $30,000 over a rolling five-year period — limit. Assuming that the SMSF has been properly accounted for as far as the tax office is concerned, what you do with your money is entirely up to you. For Centrelink purposes, the $500,000 — less the permitted gifting amount of $10,000, or $490,000 — will be added to your remaining $620,000, plus other assets. That puts you well over the current upper cut-off asset test limit of $722,000 if you are a homeowner — or $980,000 if not. However, five years after the gifts to the day, or probably in January 2029, the gifts drop out of the system. You may be eligible then. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association