Ask the Expert: Dealing with troublesome funds and ducking the ‘death tax’

Licensed financial adviser Craig Sankey answers your burning finance questions.

Licensed financial adviser Craig Sankey answers your burning finance questions. Photo: TND

Question: The fund I am in charges really high fees and has delayed the rollover to a cheaper fund for months. Can I sue them? Or do something else? 

Answer: Most rollovers between superannuation funds happen within three business days. However, this only occurs once you have correctly completed the rollover request and supplied all the required information.

This can be done via your MyGov Account or by contacting your new fund, which will provide the paperwork. Also, don’t forget to ensure your employer is aware of your new fund for future SG contributions.

All retail and industry super funds are required to have a documented complaint process, which can be found on their websites. If you feel your rollover is being unreasonably delayed, this is who you need to contact in the first instance. In the majority of cases, complaints can normally be settled using the internal complaints team.

If still unsatisfied you can take your complaint to the Australian Financial Complaints Tribunal (AFCA).

AFCA is a free, fair and independent dispute resolution scheme. It considers complaints about financial products and services, including superannuation. AFCA’s service is offered as an alternative to tribunals and courts to resolve complaints consumers and small businesses have with their financial firms.

Question: I wish to take advantage of the ‘Cash out and Re-contribution Strategy’ for superannuation contributions, and at the same time make use of the three-year bring forward rule for non-concessional contributions, to maximise the amount of the tax free component of my account balance for estate planning purposes.

I am 64 this financial year, single (never married), have no dependents and am in the fortunate position of having an account balance just exceeding $1.48 million with taxable and tax free components being 50 per cent each.

I have one only accumulation account with Cbus. I intend drawing an income stream in the next few years. I am well placed to make use of the ‘cash out and re-contribution strategy’, for the possible eventual benefit of my non-dependent beneficiaries in my will, should I be unfortunate enough to die prematurely.

I am reluctant to seek ‘independent’ financial planning advice as my previous experience with financial planners has been extremely costly with a poor outcome, and living in regional Australia adds another layer of complexity.

I well understand that this is an estate planning strategy designed to reduce the taxable component of an account balance (in order to avoid the ‘hidden death tax’), and I am familiar with the various amounts that can be withdrawn and re-contributed, depending upon an individual’s age and account balance at the end of the previous financial year.

The GENERAL questions I have are:

  • Is it a worthwhile strategy withdrawing enough funds before the end of a financial year, so that the closing account balance for that financial year is comfortably below the $1.4 million cap in order to take advantage of the full $300,000 for the three-year bring forward period?
  • Must the ‘cash out and re-contribution’ be done prior to beginning an income stream, or can it be carried out later even if you have started an income stream, provided you leave some funds invested in an accumulation account? Is this strategy really only worthwhile doing, where the taxable component is the major component of an account balance, that is, closer to 100 per cent?

Should I die prematurely, I would like my beneficiaries in my will to benefit from my years of hard work, rather than have the government claw back in the form of tax, what was supposedly given to me concessionally in the first place, for keeping my savings PRESERVED in super throughout my working life.

Answer: A ‘cash out and re-contribution’ strategy is a popular and potentially effective strategy, if you have estate planning goals such as reducing the possible tax paid to non-dependent beneficiaries. The goal of this strategy is to reduce the ‘taxable’ components and increase the ‘tax free’ components within your super fund.

Upon death, the proceeds of your super can be paid tax-free to certain beneficiaries, including a spouse, non-adult children and individuals that are financially dependent on you. For other beneficiaries the taxable component incurs tax of 15 per cent plus Medicare.

Although this strategy does provide some potential tax benefits to future beneficiaries, there are many complexities and several issues you need to be aware of:

  • The strategy is only effective if you still have funds within the superannuation environment at death. If you cashed out of super prior to your death, or if you exhausted your balance, this tax is not payable
  • Funds can only be ‘cashed-out’ if you have met a condition of release. This includes reaching age 65 or terminating a gainful employment contract after the age of 60
  • The tax free and taxable components must be drawn out ‘proportionally’. You mention that your taxable and tax-free components are split 50/50, therefore if you cashed out $300,000 then $150,000 would have to be withdrawn from each component
  • Funds can be cashed out from an accumulation fund or from a super income stream
  • To ‘re-contribute’ funds back into super you must be under the age of 67 or have met the requirements of a work test. However, if you are 65 or over then a maximum of only $100,000 applies per financial year
  • The maximum that can be contributed as a non-concessional contribution is also dependent on your total super balance from the 30th of June prior to making the contribution. I have seen many individuals breach these contribution caps and incur significant penalties
  • As you point out, if you have a total superannuation balance below $1.4 million on the previous 30 June, you can fully utilise the ‘bring forward rule’ and contribute up to $300,000 in non-concessional (after tax) contributions
  • If your balance is over $1.4 million but below $1.5 million, then you can contribute $200,000. If it is over $1.5 million but below $1.6 million, you can contribute $100,000. And if your total balance is over $1.6 million, then you cannot make after-tax contributions
  • It’s important that you take into account all of your non-concessional contributions in relation to the super caps available and don’t just look at a cash-out and re-contribution strategy in isolation.

The maximum potential benefit to your future beneficiaries would be tax savings of $25,500 ($150,000 multiplied by a combined tax and Medicare rate of 17 per cent).

Notwithstanding the fact that you have not had a good experience with financial planners in the past, as this is a very complex strategy, I would strongly recommend getting advice from a financial planner or your super fund.

Moneysmart has a guide on how to choose a financial planner that may assist you.

Be aware that if this strategy is done incorrectly there may be adverse tax consequences, or you may not be able to re-contribute all of your cashed-out funds back into superannuation.

Craig Sankey is a licensed Financial Adviser and Head of Technical Services & Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and whilst 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.  

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