John is 72 years of age and has been retired for 7 years. He is widowed and has an adult daughter, Maggie, aged 32. Maggie is financially independent and working. John has made a superannuation death benefit nomination to Maggie so that in the event of his death, Maggie would receive his superannuation benefit as a lump sum. John has $500,000 in superannuation, of which $400,000 is from his employer contributions over many years of work and investment earnings within the fund. The remaining $100,000 in his fund is from after-tax contributions that John made.

Just before his 73rd birthday, John suffers a severe heart attack and is pronounced dead on arrival in the hospital. Maggie deals with the superannuation company and a month later receives a payment of $500,000 into her nominated bank account. In conversation with her tax adviser, she learns that when the lump sum was paid, the tax-free portion of $100,000 was free of tax. However, the $400,000, known as the taxable amount, is subject to 15% tax plus a Medicare levy of a further 2%. So 17% of the $400,000 or $68,000 is now payable by Maggie as “non-dependant’s tax” in her next tax return.

Could these unfortunate tax consequences have been avoided or at the very least mitigated? In the first instance, let’s look at how they could have been mitigated by rerunning the scenario.
John seeks advice regarding his superannuation nomination to his non-dependant daughter. His Adviser instructs him to cash out $440,000 from his superannuation account before the end of the financial year and then re-contribute $110,000 in June and another $330,000 in July back into his superannuation account. This is known as the ‘Re-Contribution’ strategy, which involves withdrawing all or some of the superannuation balance and re-contributing the amount as a non-concessional contribution back into the superannuation fund. A non-concessional contribution is a contribution you do not claim as a tax deduction.

The monies withdrawn from superannuation are paid to the individual according to the taxable percentage ($400,000) and the percentage which is tax-free ($100,000). Because John is over the age of 65 years, he has automatically met a condition of release and can receive the benefits free of tax. By re-contributing these monies back into superannuation, the monies are allocated as being tax-free. The strategy potentially converts some or all of the taxable component into a tax-free component.

This means that ultimately when paid to a non-tax dependent beneficiary, i.e. Maggie, this will result in Maggie paying less tax. So in this rerun, John still suffers his heart attack and does not survive, but when Maggie receives her sump sum of $500,000, only $48,000 is subject to 17% tax, meaning Maggie pays $8,160 in tax rather than $68,000!

Let’s now rerun the scenario based on avoiding it together. In this scenario, John suffers a heart attack and survives, although his prognosis is not good. On advice, John draws all of his monies out of superannuation and leaves it in the bank. Sadly, he passes away six months later. Maggie receives the $500,000 left to her in his Will tax-free. This is an effective strategy if you are not in good health and only have a non-financial dependent family to leave your estate to.

These strategies are available due to the recent changes in February 2022 and extend the non-concessional contribution strategy until the age of 75 without needing to meet the work test from 1^st July 2022.

If you have any questions in terms of how this strategy may benefit you or your loved ones, don’t be afraid to ask. You never know if you could be John or Maggie in this scenario.

Our financial planning and consultancy services help you get your ‘financial house’ in order, ensuring the right financial foundations are in place to enable you to leverage your success and your Estate into the future.