What is a re-contribution strategy?


A re-contribution strategy is just that; a withdrawal of your superannuation benefits and a re-contribution back into super.

This is probably the simplest and easiest of strategies to implement that can guarantee:

  • Tax savings for you
  • Tax savings for your beneficiaries when you die
  • Access to increased Centrelink benefits

Why implement a re-contribution strategy?

A great reason to implement a re-contribution strategy is tax; this strategy converts the taxable portion of your superannuation benefits into tax-free components. Ultimately, resulting in a reduction of the potential tax payable when your super is passed onto your beneficiaries following your death.

This strategy can only be implemented if you are able to meet a condition of release to access your superannuation benefits and also be eligible to make a contribution back into superannuation.

Before the introduction of ‘Better Super’ legislation on 1 July 2007, the re-contribution strategy was used before commencing a superannuation sourced income stream, in order to minimise income tax in retirement. The need for a re-contribution strategy for this purpose became nearly obsolete from 1 July 2007 as the new legislation allows tax-free income from superannuation-based pensions for those aged 60 and over.

However, since 1 July 2007, the strategy is still effective from the following perspectives:

Income tax perspective: A re-contribution is still beneficial for those aged between preservation age (generally 55) and age 60 expecting to receive a superannuation income stream. You will not pay tax on the tax free portion of your superannuation income, but the taxable component will be taxed at marginal rates less a 15% tax offset.

Estate planning perspective: This strategy can also be utilised where there is some likelihood that your superannuation benefits will be inherited by those not considered to be ‘dependants’ under taxation law, such as adult children. A re-contribution can reduce the lump sum tax payable from death benefit proceeds, or in some cases, the adult beneficiaries will not be required to pay any tax at all (see table of tax rates below).

Social security perspective: When you and your spouse are of different ages, by implementing a re-contribution strategy where monies are withdrawn from the older partners account and contributed to the younger spouse (who retains their balance in the accumulation phase which is not counted for Centrelink purposes if they are under age pension age), this can significantly boost the amount of age pension available  – even if only for a few years.

Nuts and bolts: Superannuation benefits are categorised into tax-free and taxable components depending on how the original contributions were made into the fund. In the current superannuation environment, lump sum withdrawals from superannuation must be made in accordance with the proportioning rules, that is, proportionate amounts drawn from taxable and tax-free components. There is no tax payable on tax-free components.  Superfund Partners client can check the split of the components on their benefits via our online SMSF accounts.

The re-contribution strategy involves withdrawing a lump sum, paying any necessary tax on the withdrawal and re-contributing these funds into superannuation as a non-concessional contribution. Generally you will not have to pay tax on lump sum withdrawals you make from super if you are aged 60 or over. The revised superannuation balance will potentially consist of all, or more, tax-free component. When you die and the benefits are received by your non-tax dependant beneficiaries (such as adult children), there will be little or no tax payable by them.

The following table illustrates the tax rates applicable when superannuation death benefits are paid as a lump sum:


Below is a quick cheat-sheet which shows the amount of death benefits tax payable by adult children:

 Tax Payable
@ 16.5%
 $100,000 $16,500
 $250,000 $41,250
 $400,000 $66,000
 $500,000  $82,500
 $1,000,000 $165,000

Although a re-contribution strategy has the potential to save your beneficiaries tens of thousands (if not hundreds of thousands) of dollars in ‘death tax’, you personally will not see the benefit as you will be deceased.

So what is the point?  What’s in it for me?

It comes down to one thing:  If you believe that you have paid enough tax in your life, and don’t think it is fair that your children should have to pay more tax when you pass on, then a re-contribution strategy is for you.

Case Study:

Simon is 61, recently retired and the balance in his SMSF member account is as follows:

Account Based
Pension #1
Total $520,000 

The entire amount of Simon’s benefit is in an account-based SMSF pension and he is drawing the minimum amount of 4% per annum.  Simon has NOT made any contributions in excess of $180,000 for the current (2014/15) financial year, and hasn’t previously triggered the 3 year bring-forward rule.

Simon has invested the monies of his SMSF across a portfolio of blue chip equities (approx $320,000) as well as $200,000 in a term deposit. Simon has nominated his two adult children as equal beneficiaries (50/50) to receive his benefits when he dies (via a binding death benefit nomination).

Based on the above figures, if he was to pass away today, the SMSF would have to withhold and pay the following amount in death benefits tax:

  • $380,000 x 16.5% = $62,700

For Simon to totally eliminate the death benefits tax his children are liable to pay upon his death, Simon could utilise the liquidity the $200,000 provides to easily undertake a re-contribution strategy.  The following diagram outlines how such a strategy could be implemented:

Multi-pension Withdrawal Re-Contribution SMSF

The above strategy would have the following outcomes for Simon:

  • Assets did not have to be sold down – cash from the existing $200k term deposit was utilised multiple times
  • The 3 year bring forward rule (see below) was triggered ($520k in contributions meaning on $20k in non-concessional contributions available until 30 June 2017)
  • Three new pensions commenced totally $520k which will be 100% tax free (these can be easily consolidated into a single pension [Account Based Pension #5])
  • $67,200 in death benefits tax wiped out

The above strategy could be modified if Simon also had additional cash outside of his SMSF – i.e. a rollover from another super fund, sale of an investment property, inheritance.

Re-contribution strategies are the most beneficial if you are aged between 60 and 65 as you are able to withdraw your superannuation benefits tax-free (regardless of the tax components). You can then make a non-concessional contribution up to $180,000 per annum (2014/15) or up to $540,000 over a three year period using the bring forward rule.

The bring forward rule: Those under age 64 at the start of a financial year could use the three year bring forward rule and contribute up to $540,000. Important: The 3 year bring forward rule cannot be used if you are over age 65 (ie age 65 as at 1 July of the relevant financial year).  After age 75, no non- concessional contributions are possible.

There are some disadvantages of a re-contribution strategy:

  • Transaction costs such as buy/sell spreads may apply while transferring the funds
  • By implementing this strategy, your assessable and taxable income may increase for a particular financial year. A higher assessable income and taxable income may lead you to pay more tax due to loss of tax offsets, Medicare levy surcharge or reduce some Family Assistance from Centrelink.
  • You may be liable to pay tax for the withdrawal from superannuation if you are aged below 60 and depending on the components of your superannuation.
  • When re-contributing, any amount that is in excess of a specified limit, the non-concessional cap, will incur penalty tax at 46.5% (please note that at the time of writing there is draft legislation to remove these penalties in favour of a refund and nominal interest charge).
  • Any potential anti-detriment payments (refund of contributions tax paid during the accumulation phase) that a surviving beneficiary may be entitled to may be reduced or even lost as the value of these payments are proportional to the amount of taxable component present in the member’s account at death.
  • Opportunity cost when funds are not invested in the market
  • Professional fees for advice and implementation of the strategy

Is this strategy for you?

A re-contribution strategy is perfect for you if:

  1. You are between age 55 and 75
  2. You have retired or met a ‘condition of release’ to access your super
  3. You have the ability to re-contribute (work test applies if you are over 65)
  4. You have some taxable component as part of your member balance (most people do)
  5. You don’t want your beneficiaries to pay any death benefits tax in the future

If you would like to know more about this strategy, please get in touch with us.

Director at Superfund Partners. I love working in the SMSF space. Self-managed super funds are more than just a savings vehicle - they enable people to truly take control of their financial situation which is key to achieving happiness. Leading the Superfund Partners team is a privilege - they are a great crew and they always put others first.