Bonus Article, Estate planning and the recontribution strategy

What is a recontribution strategy?

The objective of the recontribution strategy is to reduce the taxable component of an individual’s superannuation account and to increase the tax-free component, which may lead to better estate planning outcomes.

To achieve this, the recontribution strategy allows individuals who have met a full condition of release (such as the retirement or reaching age 65 condition of release) to make a lump sum withdrawal from their superannuation and recontribute these funds as a non-concessional contribution (NCC) either to:

  • The same superannuation fund
  • A separate superannuation fund, or
  • A spouse’s superannuation fund

This recontribution increases the tax-free component of the superannuation fund and may have a range of other benefits, such as reducing or eliminating tax payable on superannuation death benefits paid to non-tax dependant beneficiaries, such as an adult child who is financially independent.

Factors to consider

Before implementing a recontribution strategy, it is important to consider the following:

  • You must be eligible to make a NCC to superannuation – the NCC cap limits the amount NCCs you can make to superannuation without incurring excess tax. The bring-forward rule allows eligible individuals to bring forward up to an additional two years’ worth of NCCs and add it to the current year’s cap. This means that you can contribute up to $330,000 of NCCs at one time, or any time throughout a three-year period. Since 1 July 2022, the age to access the bring-forward rule has been increased, as such you can now trigger the bring-forward rule to make a NCC to superannuation if you are under age 75 on 1 July of a financial year without meeting the work test.
  • Your NCC cap is limited by your total superannuation balance (TSB) as at the previous 30 June – this means you should check your TSB on this date by contacting your fund or by logging into myGov.
  • Check whether you are already in a bring-forward period before making a NCC – this will avoid breaching your NCC cap and paying excess tax.

Taxation of superannuation death benefits 

Whether tax applies on a superannuation death benefit depends on a number of factors, such as:

  • Whether a tax dependant or non-tax dependant receives the benefit
  • The underlying components of the superannuation benefit, and
  • Whether the benefits are paid as a lump sum or as an income stream.

The following table summarises the tax treatment when superannuation death benefits are paid as a lump sum.

Death benefit recipientSuperannuation componentTax treatment of lump sum
Tax dependent

(ie, spouse, children under 18, or any person who was in an interdependency relationship or was financially dependent on the deceased before they died)

Tax-freeNo tax payable
 Taxable (taxed and untaxed elements)No tax payable
Non-tax dependant

(ie, children 18 and over)

Tax-freeNo tax payable
 Taxable (taxed element)Up to 17%*
 Taxable (untaxed element)Up to 32%*

Includes 2% Medicare levy. However, if the death benefit is paid through the deceased estate, the executor or administrator of your estate pays the tax and Medicare levy is not payable.

Example – estate planning benefits of the recontribution strategy 

Daniel turned 65 on 10 January 2023 and is still working. He has $440,000 in superannuation which consists of a 100% taxable component. His adult daughter, Adriana, is the nominated beneficiary on his superannuation account. Adriana is not a tax-dependant of Daniel as she is not financially dependent and they are not considered to be in an interdependency relationship. 

If Daniel were to pass away without implementing a recontribution strategy, the tax on his$440,000 death benefit could be as high as $74,800 (ie, $440,000 x 17%). 

By contrast, if Daniel implemented a recontribution strategy, he could make two withdrawals across a period of two financial years, recontributing the funds back into superannuation each time as NCCs.

That is, he could make $110,000 in 2022/23 and then $330,000 by triggering the bring-forward rule in 2023/24.

This strategy can be illustrated as follows:

 Total balance ($)Tax-free component ($)Taxable component ($)Taxable component (%)
Starting balance$440,000$0$440,000100%
After recontribution 1 in 2022/23 ($110,000)$440,000$110,000$330,00075%
After recontribution 2 in 2023/24 ($330,000)$440,000$440,000$00%

By implementing the recontribution strategy, the potential death benefits tax has reduced from $74,800 to nil as Daniel’s taxable component has reduced from 100% to 0% due to making the two NCCs of $440,000. 

This leaves Adriana with a larger inheritance from her father‘s death benefit payment. 

Need help?

Although the recontribution strategy has a number of benefits, there are also potential pitfalls to consider as part of implementing this strategy. If you have any questions or are wondering if this strategy may suit you, please contact us for more information.