The Recontribution Strategy: Making Super Tax-Free for Your Heirs
Adult children can face up to 17% tax on inherited super. The recontribution strategy converts taxable super into tax-free super, potentially saving your beneficiaries tens of thousands.
The Problem: Tax on Super Death Benefits
When super is paid to adult children (who aren't financial dependants), the taxable component is taxed at up to 17% (15% + 2% Medicare levy).
Most retirees' super is predominantly taxable—made up of employer contributions, salary sacrifice, and investment earnings. Only non-concessional contributions are tax-free.
The Tax Hit
Sarah has $800,000 in super: 90% taxable ($720,000), 10% tax-free ($80,000).
When she dies, her adult son inherits. Tax on the taxable component:
$720,000 × 17% = $122,400 in tax
How the Recontribution Strategy Works
The strategy involves:
- Withdraw from your super (as a lump sum or pension payment)
- Recontribute the same amount as a non-concessional contribution
The withdrawal maintains its proportional mix of taxable/tax-free. But the recontribution is 100% tax-free (non-concessional contributions are after-tax money).
Over time, you shift your super from taxable to tax-free component.
The Limits
- Non-concessional cap: $120,000 per year (or $360,000 using bring-forward)
- Total Super Balance: Must be under $1.9 million to make NCCs
- Age: Must be under 75 (or meet work test requirements)
- Access: Must have met a condition of release to withdraw
Example continued: Sarah withdraws and recontributes $120,000 per year. After 3 years using bring-forward, she's moved $360,000 from taxable to tax-free. Her son's potential tax bill drops by over $60,000.
When It Makes Sense
- You're leaving super to adult children (not spouse)
- Your super is predominantly taxable
- You have unused non-concessional cap space
- Your Total Super Balance is under $1.9 million
- You're comfortable temporarily holding funds outside super
Important Considerations
Cash Flow
You need to withdraw before you recontribute. This creates a brief period where funds are outside super—you may want to time contributions to minimise this gap.
Centrelink Impact
Moving money in and out of super doesn't change your total assets, but timing may affect deeming of income.
Transfer Balance Cap
If you're already in pension phase, withdrawals reduce your transfer balance account. Consider whether you'll need to commute (withdraw from) your pension.
Do It in Stages
You don't have to do everything at once. Many people recontribute $120,000 per year over several years, gradually shifting the tax-free proportion.
How Talk Through Wealth Helps
Model the recontribution strategy for your situation:
- Calculate current taxable vs. tax-free components
- Project tax savings for beneficiaries
- Plan recontributions within cap limits
- Model multi-year strategies
- Factor in Total Super Balance and transfer balance cap