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Self Managed Super Fund (SMSF) Article
Withdraw and Re-Contribution Strategy

By Tony Negline.

This article may be out of date.

16th June 2004

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In a previous article we revealed the Australian Tax Office’s growing interest in a common superannuation strategy often called, “withdraw and re-contribute”.

We received a large number of responses to this article.  The majority of responses clearly show that most people are keen to avoid getting into trouble but also want to know how to produce the best result.

The strategy can be done in any type of super fund including Self Managed Super Funds.  (Many fund manager super funds would perform this series of transactions frequently.)

By far the biggest confusion with this strategy from an investor perspective is to know at what point the rules are being stretched too far.  This is a difficult question to answer.  Almost each case needs to be assessed to determine what is the right course of action for those circumstances.  (Never believe anyone who tells you they can make superannuation simple!)

In its plainest form the strategy sounds quite simple: a super fund member withdraws a sum of money from the fund and then re-contributes the net amount back to the same super fund or to another super fund.  To begin this strategy it is important to remember that money can only be taken out of superannuation if the preservation rules have been satisfied.

Many investors have been attracted to the withdraw and re-contribution strategy because it is relatively straightforward and because, under current tax laws, it can produce real tax savings over the long term.  However you have to be very careful about the perceived tax benefits as the following example shows.

Betty Smith, aged 65 has $400,000 in super assets.  Assume that all of this is Post June ’83 Component.  We will assume that she has no Reasonable Benefit Limit problems to worry about.  She would like to start an allocated pension but is unsure of the income tax implications.  For the sake of simplicity we will assume that she is ineligible for all tax rebates and tax credits except the 15% rebate which some taxpayers who receive pensions or certain annuities are able to receive.  We will also assume that she has no other income.

She considers two scenarios.  The first is to simply commence an allocated pension.  Assuming Betty takes the minimum income ($25,477) in the year her pension commences all of this amount will be subject to income tax however she will not pay any tax because of the 15% rebate.  Depending on her precise circumstances, she may have to pay the Medicare Levy.

The second strategy she considers is to withdraw $300,000 of her benefits as a lump sum.  The first $117,576 of this amount is tax-free.  The balance is taxed at 16.5% - about $30,000 tax.  She takes the next about, $270,000 and re-contributes it back into her super fund giving her a net $370,000.  Betty would begin this allocated pension with $23,567 coming out as income payments.  The $270,000 which is contributed to super is returned to Betty with each income payment.  We call this a “Deductible Amount” and it is determined by taking the Undeducted Contributions and dividing by her actuarial life expectancy.

With this strategy she pays no income tax because of the effect of the 15% rebate.  However depending on her personal circumstances she may not need to pay the Medicare Levy.

Under both scenarios, Betty has 15% rebate left over.  Unless Betty has other income that excess rebate is lost and she would be no better off by taking money out and contributing back into superannuation.

Although Betty is no better off using the withdraw and re-contribution strategy, some investors are concerned that the 15% rebate may be reduced or eliminated by a future government whereas it would be harder to remove the locked-in the tax concessions of Undeducted Contributions.

If Betty is not concerned about the loss of the 15% rebate then the withdraw and re-contribution strategy does not do anything for her.  Investor’s in a similar to Betty may have used this strategy with a view to improving the after-tax situation of their retirement income but the fact is they are probably no better off.

So why would the ATO be interested in attacking a strategy that has no tax benefit?  Perhaps a better question might be, why would an investor do a strategy that has little benefit?

Here we have only looked at one case study and a relatively simple situation.  As a general rule the larger the level of super assets the better the potential tax savings that might be available.  The “withdraw and re-contribution” strategy can be particularly beneficial when someone has super assets greater than their lump sum Reasonable Benefit Limit.

It would seem that the ATO are concerned where someone does a large number of withdraw and re-contributions over a short period of time or merely enters into the series of transactions to obtain a tax benefit and no other purpose can be identified.

Into this mix we can add the complexity of the recent High Court decision involving split dollar loans (Commissioner of Taxation v Hart & Anor [2004] HCA 26).  The preliminary view appears to be that the ATO has been given a significant increase in its powers to apply the income tax anti-avoidance provisions.


Scenario 1

Scenario 2

Super Assets



Minimum income payment (annualised)



Deductible Amount



Income tax



15% rebate



Excess Rebate



Net Income Tax



Net Pension



(medicare levy has been excluded)

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