Re-contribution strategies and contribution caps - recent case

Re-contribution strategies – consider the contribution cap issues.

While re-contribution strategies are effective to re-mix the taxable and tax free portions of super benefits, these strategies rely on the member being able to re-contribute the amount which has been withdrawn from the super system.

There are two aspects to the ability to re-contribute: first the member must satisfy the SIS contribution rules and secondly, the amount re-contributed will be counted for contribution cap purposes.

The SIS contribution acceptance rules are not an issue for those under age 65.  However, for those over age 65 the work test must be satisfied before the re-contribution can be made.

In any event the amount re-contributed will, for the contribution cap rules, be treated as new money going into the super system rather than old super money returning.

This last point is clearly illustrated in a recent AAT case dealing with excess non-concessional contribution assessment.  In this case, the taxpayer withdrew about $350,000 from the super system (which was perfectly proper as the money represented unrestricted non-preserved amounts) after age 60 (so, not exit tax) and invested the money in term deposits.  The taxpayer undertook this action as a response to the significant decline in super assets in 2008 and early 2009 and the announcement of the Government guarantee of bank deposits.  

At the maturity of the term deposits, the taxpayer returned the money to the super system.  The returned money re-entered the super system as non-concessional contributions.   Unfortunately, the money was not returned as one large deposit exceeding the fund capped contribution limit.  The ATO identified that the taxpayer had exceeded the non-concessional contribution cap and duly issued an excess contributions tax assessment - giving rise to a $30,000 tax bill (in round figures).

The taxpayer objected and took the matter to the Administrative Appeals Tribunal.  The taxpayer failed to persuade the Tribunal that there were special circumstances and the Tribunal upheld the assessment.  The Tribunal held that special circumstances did not arise merely because the excess non-concessional contributions were returned contributions.  The Tribunal held that in withdrawing and re-contributing the withdrawn amounts, the taxpayer was not trying to achieve a better tax mix but simply trying to preserve the value of his retirement savings – which the Tribunal accepted had been the result of many years of contributions.  

The decision clearly demonstrates the need to carefully consider the contribution cap aspect of any re-contribution strategy – the re-contributed amounts will be treated as new money entering into the super system and will be counted for contribution cap purposes.

The case is reported as McLennan v Commissioner of Taxation  [2013] AATA 311