Question 1

I currently have an income account with QSuper from which I draw a monthly pension. As I am over 60, my pension is tax free.

I have heard that if I withdraw all of my account balance it will be tax free and I can then somehow recontribute it back as an after tax contribution so that my beneficiaries won’t pay tax.

Is this correct? Does the bring forward limit of $390 thousand over three years apply if I try to recontribute back the entire sum. Is there some special name for this type of action?

This strategy is commonly referred to as a ‘cash-out and re-contribution strategy’.

The purpose of cashing out super and re-contributing it back is to convert “taxable” super components into “tax-free” super components.

Why do this? Because when you pass away, your taxable component will be taxed at 17 per cent (which includes Medicare) if it is paid to beneficiaries not listed below:

• spouse
• child under 18
• a person with whom the deceased person had an interdependency relationship just before they died
• a person who was financially dependent upon the deceased person just before they died.

However, the tax-free component is always paid tax free – no matter who the funds are left to.

Most people have mainly “taxable” components within their super. This is because all of the following go into the “taxable” component:

• Employer superannuation guarantee contributions
• Salary sacrifice
• Personal contributions where you claim a tax deduction
• All investment earnings while in accumulation phase.

Before undertaking a cash-out and re-contribution strategy, you have to ensure you can get the money back into super.

Currently the maximum non-concessional after-tax cap using the bring-forward rules is $390,000, assuming your balance is below $1,840,000 (balance as at the previous June 30).

So yes, the bring forward rules apply to this strategy. If your balance is higher than $1,840,000 then the maximum amount you can contribute to super will reduce.

You also have to be under 75 years of age to make a non-concessional contribution.

If you only have a pension/income stream account, you will need to contribute the funds into a new accumulation account. This part should be easy to do. However, you then either have to start a second pension, or combine your existing pension with these funds.

These strategies can get complicated so speak with your super fund or a financial adviser.

Question 2 

I bought my house 35 years ago and am thinking of downsizing soon. I’m now 72 and I live alone.

My understanding of the downsizing rules is that an individual can only deposit $300,000 to their super this way.

Is there no exception for single people who have sole equity in their home?

If not, what would be the best investment strategy for, say, a further $300,000, since I am considering renting my future home?

If you are 55 years old or older, you may be able to contribute up to $300,000 from the proceeds of the sale of your home into your complying superannuation fund as a downsizer contribution.

Importantly for you a downsizer contribution does not count towards contributions caps (concessional or non-concessional).

Therefore, you can also make full use of the non-concessional cap as well. This could be up to an additional $390,000 – depending on your total super balance, as shown in the table below:

In order to qualify for a valid downsizer contribution you must meet all the following conditions:

• You are aged 55 years old or older at the time you make the contribution.
• Your home was owned by you and/or your spouse for 10 or more years before the sale. If only one spouse owned the home, the other is also eligible to contribute if the other conditions are met.
• The home being sold is a residential building in Australia and is not a caravan, houseboat, or mobile home.
• The sale qualifies for the main residence capital gains tax (CGT) exemption (i.e. it must have been your principal place of residence for at least part of the ownership).
• You have not previously made a downsizer contribution from the sale of another home, or the part sale of your current home.
• You provide the correct notification to your super fund before, or at the time you make your contribution.
• You contribute within 90 days of receiving the home sale proceeds (usually at settlement) unless you obtain an exemption from the ATO.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.