A technical specialist has recommended SMSF members who are looking to undertake a withdrawal and recontribution strategy aimed at reducing the taxable component of their retirement savings benefits which is substantial to put the money back into the superannuation environment via a different fund.
In a similar vein, Colonial First State senior technical manager Tim Sanderson suggested members of public offer funds use a different account when making the recontribution.
Sanderson proposed this approach for super fund members in this situation as they will have to make multiple drawdowns and recontributions to effectively change the tax characteristics of their benefits.
“If you contribute back to the same account, that account will now be made up of both tax-free and taxable components so when you go to withdraw the second amount, part of that withdrawal will be made up of a tax-free component due to the proportioning rules and the more times you do it, the higher and higher the tax-free proportion [becomes],” he explained during a recent FirstTech podcast.
To illustrate this point, he put forward an example where an individual with a super balance of $600,000, entirely taxable, was wanting to convert the total amount to become tax-free.
“One way to do that, assuming current [contributions] caps and that the client can cash out and recontribute $360,000 under the bring-forward rule, would be to cash out and recontribute $120,000 in each of two consecutive years and then cash out and recontribute $360,000 in the third year,” he said.
“If we recontributed each withdrawal to a different account, that would allow us to convert the full $600,000 into a tax-free component as each of the withdrawals would have been made up of 100 per cent taxable component.
“Alternatively, if we recontributed back to the same account, we would end up with $153,600 in taxable component still left in the account as the second and third withdrawals would have been made up of 20 per cent and 36 per cent tax-free component due to the way the proportioning rules operate.”
He then noted why it would be prudent for an SMSF member faced with the same situation to recontribute into a different fund.
“In an SMSF [you] can only ever have one accumulation interest per member for the purpose of the proportioning rules. So therefore recontributing to a separate accumulation account within the same SMSF would have no effect for those purposes and the subsequent withdrawals would still need to be made up proportionately of that tax-free component that’s been recontributed,” he explained.