SMSF Financial Planning

What is a Self-managed Superfund (SMSF)?

A self-managed super fund is what superannuation -a fund containing superannuation manages by you. When you decide what to invest in, the market superannuation manages. Superannuation comes with a responsibility to ensure your Self-managed Super-Fund is compliant.

SMSF trustees have extensive administrative, reporting, and record-keeping obligations to ensure their fund complies with superannuation and taxation legislation. These responsibilities include setting up a compliant SMSF, Annual tax obligations, maintaining compliance, reporting, and financial statements. Your superannuation fund is a mix of taxable and non-taxable components.

Contributions made to your fund on which you have already paid tax will make up the tax-free elements. These after-tax contributions also reference as non-concessional. Meaning that tax cannot be paid on these funds when withdrawn.

When withdrawing lump sums from superannuation, it must apply by the proportioning rules, which means that proportionate amounts will be from taxable and tax-free elements of your super. Therefore, a re-contribution strategy can be appropriate for reducing the taxable component of your superannuation.

In basic terms, a re-contribution to your super is when you withdraw your super as a lump sum to pay the necessary tax on that sum. Once the tax on that amount becomes payable, it becomes non-taxable. It can, therefore, be re-contributed to your superannuation as a non-concessional (non-taxable) contribution-i.e. contribution, a payment is not allowed to be processed when withdrawn.

The conditions of using a re-contribution strategy are that you can only implement it if you meet the conditions of release that allow you to access your superannuation for withdrawals-e.g. do you meet the right age criteria and income requirements?.

The other condition is that you must also be eligible to place contributions into your superannuation too-or you can not complete the re-contribution. There are some obvious benefits to implementing the re-contribution strategy. These benefits include reducing the taxable portion of your superannuation and therefore planning for when you use it as income in retirement or when your beneficiaries use it in the event of your death. By re-contributing your superannuation and reducing the taxable component, you can ensure that your beneficiaries pay less or no tax, even if they are not eligible for tax-free payments (e.g., if they are an adult-dependent).

The re-contribution strategies are most used by people who are just before their retirement, EMT ages-around fifty-five to sixty-five. This age-group benefits from these strategies, because they are eligible to make withdrawals from the superannuation, they are not required to pay tax components if they are over sixty. But may not need access to the funds at that time so they can happily pay the tax due and re-contribute the sum to benefit the strategy at a later time in their life (or for their beneficiaries to benefit for it instead).

One reason people may choose to use the re-contribution strategy is to improve their estate planning. They may wish to ensure that taxes on contributions are taken care of so that their beneficiaries do not have to worry about paying tax when they receive the member’s in the event of the super member’s death.

Spouses and dependents under 18 will not have to pay tax on their payment, but adult dependents do on the taxable components of the super. The more non-concessional contributions made to a super fund, the smaller the taxable component will be on withdrawal. An alternative method to reduce or improve the tax payable by adult-dependent beneficiaries in the past has been the Anti Detriment Payment- but this is now no longer in service. The Anti-Detriment Payment delivered a refund (from the SMSF) of all tax paid on contributions made by the deceased member over the life of the benefit.

The method of payment was only available with a lump sum payment to a dependent, but it was available for all dependents, including adult children. The conditions of the payment were that the SMSF must have fund members still in the accumulation phase and with enough reserves to pay the refund of tax. Both this and re-contribution strategies have the same purpose-to reduce the tax payable in time of benefits is given from the super. There are some possible disadvantages to using a re-contribution strategy that a member should know before implementing it.

If you are below sixty, you may be eligible to pay tax on your withdrawal; there is a cap on the amount that you can contribute, and any amount over that will incur a penalty tax. Your assessable and taxable income may increase for a particular financial year due to the increase in funds you get in receiving with withdrawal. Transaction costs such as buy/sell spreads may apply in the transfer of funds. If you are considering a re-contribution strategy. A strong suggestion is that you speak to your financial adviser.