Withdraw and Recontribution – Saving Death Benefits Tax

Many clients will tell you that one of their main objectives is to be able to provide a legacy for their children, grandchildren or those that they love, upon their death.

Whether this legacy is via the distribution of lifestyle assets (their homes, cars or personal items) or via insurance payouts, investment assets or superannuation savings, many clients forget about the potential tax implications associated with such legacies.

Superannuation assets, in particular, can provide non-dependent beneficiaries (non-dependent children, grandchildren, friends) with a nasty shock when they realise that the initial account balance they had anticipated receiving has had Death Benefits Tax of up to 17% (15% tax plus 2% Medicare Levy) deducted from the total balance. We believe that this is certainly something that clients don’t anticipate nor take into consideration when they are undertaking estate distribution planning.

Of course smaller account balances will only be impacted mildly; however most of your client’s will agree that any level of Death Benefits Tax is better to remain in the hands of their loved ones, than those of the tax office.

It is important to note that Death Benefits Tax is only payable on the portion of a client’s superannuation savings that are:

  1. held in the taxable component of their superannuation plan / retirement savings, and

  2. paid to a non-dependent beneficiary (i.e. not their spouse or dependent persons)

The taxable component of a client’s superannuation savings is made up of:

  1. Employer Superannuation Guarantee Contributions

  2. Any additional employer contributions

  3. Salary sacrifice contributions in which a tax deduction has been claimed

  4. Personal contributions for which a tax deduction has been claimed

While current legislation for those over age 60 allows for individuals to withdraw 100% of their superannuation / retirement savings tax free, many clients (and their families) may hold the mindset that they will simply withdraw the funds should they become ill. It is however important that these clients are aware that unexpected events do occur and that it may be possible that this type of emergency strategy cannot be implemented as initially planned.

To avoid these situations, Advisers should consider the benefits of their client’s undertaking a ‘Withdraw & Recontribution’ strategy whilst they remain eligible. As the name suggests, this type of strategy involves a two (2) step process of:

  1. Withdrawing an eligible amount from the superannuation/retirement environment; and

  2. Recontributing the funds back into the superannuation/retirement environment as a non-concessional (tax free) contribution.

Non-concessional contributions are considered ‘tax-free’ contributions as no deductions can be claimed against the client’s annual income. These contributions are added to the tax-free component of a client’s superannuation / retirement savings and in the event of a client’s death, are paid to beneficiaries’ 100% tax free. This effectively reduces the level of death benefits tax client beneficiaries may be liable to pay.

In order to implement this type of strategy, Adviser’s need to be aware of the following four key criteria relating to their clients situation:

  1. Are they aged between 60 and 64 years old and retired?

  2. Are they aged between 65 and 74 years of age?

  3. If aged over 65, are they still working and do they meet the works test.

  4. What level of non-concessional contributions have the clients made in the last 12 months or in the last three (3) financial years.

As outlined in our previous article – Non-Concessional Contribution Changes – Planning Ahead, from July 1, 2017 the level of eligible non-concessional contributions an individual can make will reduce as follows:

Eligible Non-Concessional Contributions Limits

Pre June 30, 2017

  • Annual Limit - Subject to works test between 65 and 74 years of age - $180,000

  • Bring Forward Provisions (rolling three (3) year period) - Eligible only for those aged 64 years of age or younger - $540,000 (over three (3) years)

Post July 1, 2017

  • Annual Limit - Subject to works test between 65 and 74 years of age - $100,000

  • Bring Forward Provisions (rolling three (3) year period) - Eligible only for those aged 64 years of age or younger -$300,000 (over three (3) years)

Withdrawal and recontribution strategies can be an effective way of reducing the levels of potential death benefits tax your client's beneficiaries will be liable to pay; however it is important that appropriate planning is undertaken to ensure that this strategy is implemented appropriately and effectively.

The attached PDF document provides you with examples of how a Withdraw and Re contribution Strategy can benefit your clients. Please Click Here to view these examples.

For further information of help in regards to project work to filter these clients from your client base, please do not hesitate to contact Janine at Financial Planning Support Solutions at 0457 161 958 or via email at Janine.fpss@gmail.com.

This post was written by Janine McLean, Owner and Paraplanner at Financial Planning Support Solutions.

Janine holds a Diploma in Financial Services (Financial Planning) and has in excess of 14 years’ experience in the Financial Planning Industry. Financial Planning Support Solutions provides contracting and outsourced paraplanning services to Advisers Australia wide and can help, not only with your Statement of Advice preparation, but also Strategy Planning, Compliance, Administration and Project work as required. For further information in relation to Janine or Financial Planning Support Solutions, please refer to our website fpsupportsolutions.com.au.

Disclaimer: The information provided in these articles is general in nature only and based on the interpretation and understanding of the writer. All information should be clarified with the appropriate parties, legislative offices or government departments prior to providing advice to your clients. If, as an individual, you are reading this post for the purposes of your own personal financial knowledge, you should seek guidance from your Financial Adviser, Accountant or Solicitor prior to implementing any changes to your own personal position.

Copyright 2017 Financial Planning Support Solutions, All rights reserved.

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