What is a super re-contribution strategy?

What is a super re-contribution strategy?

Most Aussies usually think of contributing to super while they’re working and withdrawing it when they retire. However, in some cases, you may be able to use a superannuation re-contribution strategy. Meaning you can withdraw a portion of your super and contribute back into your super fund later. Implementing a super re-contribution strategy can ensure that you or your heirs can withdraw your super later without needing to pay any tax. Super re-contribution can also be an estate planning measure that allows a deceased person’s heirs to access their super without worrying about the tax liability. However, to re-contribute super, you need to be able to withdraw benefits and make contributions.

Usually, you can’t withdraw super until you reach the age of preservation, which can be between 55 and 60 years, or qualify for early release of your super on compassionate grounds. You’ll have to pay tax on any withdrawn amount at the tax rate corresponding to your chosen withdrawal method. If you’re aged 65 years or older, you may have to prove that you have some sort of employment before making personal super contributions. Given these conditions, not everyone may be able to utilise a superannuation re-contribution strategy.

How does a super re-contribution strategy help me save on tax?

When you withdraw your super, you’ll need to mention it on your tax return and may pay tax on some part of the amount. The part of your super that is “taxable” is usually employer contributions or salary-sacrificed super contributions. They are taxed at a concessional tax rate of 15 per cent up to a certain limit when you withdraw them. However, if you exceed the limit or if your heirs have to withdraw your super, you or they may have to pay a higher tax rate. This tax rate can also depend on whether your super fund provider paid taxes on the money. Your super fund manager should issue a withdrawal statement mentioning the components that make up your super.

Once you withdraw super and pay any necessary tax, you may re-contribute the whole amount as a non-concessional super contribution. You can later withdraw these deposits, considered taxed deposits, without paying any additional tax. Before making any non-concessional contributions, however, you’ll need to check your super balance. And before you withdraw any super, consider discussing the amount you should withdraw and the tax you may need to pay with your accountant. Remember that you may have to report super withdrawals on your tax returns, irrespective of whether you have to pay tax on them.

Can I withdraw, but not re-contribute super benefits?

You may qualify to withdraw super benefits early, or before your super fund’s preservation age, in specific circumstances. These could include circumstances such as after an accident leaves you disabled or unable to continue working. In 2020, the Australian government also permitted people who’d experienced financial hardship due to the Coronavirus pandemic early release of up to $20,000 in super. However, the Australia Taxation Office (ATO) takes a strict view on early super withdrawals. If you made a super withdrawal under such circumstances, re-contributing super at a later time could land you in trouble with the ATO. You may need to pay tax on the entire amount of withdrawn super at your marginal tax rate irrespective of whether the benefits are taxable or tax-free.

If your super balance was more than the transfer balance cap of $1.6 million at the end of the previous financial year, you might not be able to re-contribute the super in the same year that you withdrew it. You’d have to wait at least until the next tax year, and again check if your super balance fell below $1.6 million before re-contributing. Further, you may need to check if you run the risk of exceeding the transfer balance cap - and paying more taxes - when you re-contribute super. 

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Learn more about superannuation

Can I buy a house with my superannuation?

First home buyers are the only people who can use their superannuation to buy a property. The federal government has created the First Home Super Saver Scheme to help first home buyers save for a deposit. First home buyers can make voluntary contributions of up to $15,000 per year, and $30,000 in total, to their superannuation account. These contributions are taxed at 15 per cent, along with deemed earnings. Withdrawals are taxed at marginal tax rates minus a tax offset of 30 percentage points.

Voluntary contributions to the First Home Super Saver Scheme are not exempt from the $25,000 annual limit on concessional contributions. So if you pay $15,000 per year into the First Home Super Saver Scheme, you have to make sure that you don’t receive more than $10,000 in superannuation payments from your employer and any salary sacrificing.

What is the superannuation rate?

The superannuation rate, or guarantee rate, is the percentage of your salary that your employer must pay into your superannuation fund. The superannuation guarantee has been set at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

What age can I withdraw my superannuation?

You can withdraw your superannuation (or at least some of it) when you reach ‘preservation age’. The preservation age is based on date of birth. Here are the six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

When you reach preservation age, you can withdraw all your superannuation if you’re retired. If you’re still working, you can begin a ‘transition to retirement’, which allows you to withdraw 10 per cent of their superannuation each financial year.

You can also withdraw all your superannuation once you reach 65 years.

Do I have to pay myself superannuation if I'm self-employed?

No, self-employed workers don’t have to pay themselves superannuation. However, if you do pay yourself superannuation, you will probably be able to claim a tax deduction.

How long after divorce can you claim superannuation?

You or your partner could be forced to surrender part of your superannuation if you divorce, just like with other assets.

You can file a claim for division of property – including superannuation – as soon as you divorce. However, the claim has to be filed within one year of the divorce.

Your superannuation could be affected even if you’re in a de facto relationship – that is, living together as a couple without being officially married.

In that case, the claim has to be filed within two years of the date of separation.

Either way, the first thing to consider is whether you’re a member of a standard, APRA-regulated superannuation fund or if you’re a member of a self-managed superannuation fund (SMSF), because different rules apply.

Standard superannuation funds

If your relationship breaks down, your superannuation savings might be divided by court order or by agreement.

The rules of the superannuation fund will dictate whether this transfer happens immediately, or in the future when the person who has to make the transfer is allowed to access the rest of their superannuation (i.e. at or near retirement).

Click here for more information.

SMSFs

If your relationship breaks down, you must continue to observe the trust deed of your SMSF.

So if you and your partner are both members of the same SMSF, neither party is allowed to use the fund to inflict ‘punishment’ – such as by excluding the other party from the decision-making process or refusing their request to roll their money into another superannuation fund.

This no-punishment rule applies even if the two parties are involved in legal proceedings.

Click here for more information.

Financial consequences

Superannuation funds often charge a fee for splitting accounts after a relationship breakdown.

Splitting superannuation can also impact the size of your total super balance and how your super is taxed.

Click here for more information.

What is salary sacrificing?

A salary sacrifice is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Salary sacrifices come out of your pre-tax income, whereas personal contributions come out of your after-tax income.

What happens to my superannuation when I change jobs?

You can keep your superannuation fund for as long as you like, so nothing happens when you change jobs. Please note that some superannuation funds have special features for people who work with certain employers, so these features may no longer be available if you change jobs.

How do I choose the right superannuation fund?

Different superannuation funds charge different fees, offer different insurances, offer different investment options and have different performance histories.

So you need to ask yourself these four questions when comparing superannuation funds:

  • How many fees would I have to pay and what would they cost?
  • What insurances are available and how much would they cost?
  • What investment options does it offer? How would they match my risk profile and financial needs?
  • How have these investment options performed historically?

How do you set up superannuation?

Before you set up a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

How is superannuation calculated?

Superannuation is calculated at the rate of 9.5 per cent of your gross salary and wages. So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.

What are ethical investment superannuation funds?

Ethical investment funds limit themselves to making ‘ethical’ investments (which each fund defines according to its own principles). For example, ethical funds might avoid investing in companies or industries that are linked to human suffering or environmental damage.

Am I entitled to superannuation if I'm a contractor?

As a contractor, you’re entitled to superannuation if:

  • The contract is mainly for your labour
  • You’re over 18 and earn more than $450 before tax in a calendar month
  • You’re under 18, you work more than 30 hours per week and you earn more than $450 before tax in a calendar month

Please note that you’re entitled to superannuation even if you have an Australian business number (ABN).

When is superannuation payable?

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.