This week we explore how a recontribution strategy can reshape the tax profile of your super and why understanding your personal transfer balance cap matters more than the headline number.
When Malcolm commenced two account-based pensions in November 2024 totalling $1,560,000, the general transfer balance cap was $1.9 million. While the cap is expected to rise further in coming years, what many retirees do not realise is that their personal transfer balance cap is not automatically reset to the new headline figure.
Your personal cap is based on the highest percentage of the general cap you have used. In Malcolm’s case, starting pensions of $1.56 million meant he used approximately 82 per cent of the $1.9 million cap. Only the unused portion, roughly 18 per cent, is eligible for indexation. When the general cap increases, only that unused percentage receives the uplift. This means Malcolm’s personal cap will increase incrementally, not to the full new general cap amount.
Understanding this distinction is critical before implementing a recontribution strategy.
A recontribution strategy involves withdrawing a lump sum from super and re-contributing it as a non-concessional contribution. The objective is to convert taxable components of super into tax-free components. This matters because when super is paid to non-dependant beneficiaries, such as adult children, the taxable component can attract tax of up to 17 per cent including Medicare levy if paid directly from the fund. The tax-free component is paid entirely tax free.
In Malcolm’s case, his super balance has an 80 per cent taxable and 20 per cent tax-free split. On $1.56 million, that means roughly $1.248 million is taxable. If paid to non-dependants, this could result in a substantial tax liability. By withdrawing up to the maximum non-concessional bring-forward amount, currently $360,000 where eligible, and re-contributing it, he gradually shifts the balance towards a higher tax-free proportion.
The strategy works because of how the transfer balance account is tracked. When Malcolm withdraws $360,000 as a lump sum commutation, the Australian Taxation Office records a debit to his transfer balance account. When he recontributes and starts a new pension with that amount, a credit is recorded. The debit and credit effectively offset, provided the withdrawal is correctly processed as a commutation rather than a regular pension payment. If incorrectly processed, the new pension credit could cause an excess transfer balance issue.
It is essential that the commutation is documented and implemented properly each time.
Eligibility for the full $360,000 bring-forward depends on total super balance thresholds at the previous 30 June. Once total super balance approaches $2 million, the ability to recontribute phases out entirely. This makes timing and monitoring balances critical.
Over successive rounds, the proportioning rule applies. Each withdrawal reflects the existing taxable and tax-free proportions. After the first recontribution, the taxable proportion reduces, meaning subsequent withdrawals convert a smaller taxable amount. Some investors consider contributing recontributed amounts to a separate fund to maintain a 100 per cent tax-free component in that new pension, rather than blending it back into the original mix.
There is also a broader strategic consideration. Malcolm is 65 and his wife is 10 years younger with a super balance of $520,000 in accumulation phase. While recontributing to his own pension may improve the tax outcome for eventual non-dependant beneficiaries, there is merit in reviewing the overall balance between the two spouses.
Contributing to his wife’s super could help even out balances and provide flexibility. However, while she remains under 60, her super earnings are taxed at up to 15 per cent in accumulation phase. In contrast, Malcolm’s pension earnings are tax free. In many cases, it may be more effective to contribute to the younger spouse closer to age 60, when commencing a pension would move those assets into a zero tax earnings environment.
Ultimately, a recontribution strategy can meaningfully reduce the tax burden on adult children inheriting super. However, it must be carefully aligned with personal transfer balance cap limits, bring-forward eligibility thresholds, cash flow needs, and the longer term objective of ensuring both spouses are financially secure throughout retirement.
Before focusing solely on estate tax outcomes, it is worth asking a broader question: will the structure of your super today provide enough flexibility and tax efficiency to support both partners for what could be three decades or more of retirement?
If you would like to review whether a recontribution strategy is appropriate for your circumstances, or ensure your transfer balance cap, pension structure, and estate planning objectives are properly aligned, please contact Cadre Capital. We can model the outcomes, manage the commutation and contribution process correctly, and ensure the strategy is implemented in a compliant and tax effective manner.