The “cap space” trap of recontribution strategies in SMSFs

Blue piggy bank with my super

The recontribution strategy has been a long-established strategy amongst SMSFs over the years and has become more popular as older trustees begin to think about their intergenerational transfer of wealth. With the complexity in recent times of the interaction between the Personal Transfer Balance Caps (”TBC”), Transfer Balance Account (“TBA”) “cap spaces” and non-concessional contribution (“NCC”) caps, it can be a fine balancing act.

Here are a few common traps which can be avoided by doing your homework in advance, but first let’s recap on the basics.

Why can the recontribution strategy be useful?

As the name suggests, the recontribution strategy involves a withdrawal of your super balance and then redepositing it – that is, re-contributing it to your superannuation fund. The main advantage of this is the tax benefit of recycling the taxable component of your superannuation into a tax-free component. The benefit of this tax saving will generally not be felt when you are still alive, but for the beneficiaries that inherit your superannuation when you pass away.

Common traps – what to keep an eye out for

Has your SMSF lodged its most recent annual tax return?

As the NCC caps are a function of your Total Super Balance (“TSB”) as at the 30 June of the prior financial year, it is important to ensure that the ATO has the correct balances of all your superannuation balances to calculate your cap. This can sometimes be difficult if your SMSF may not have lodged last year’s tax return (or have multiple years outstanding) when you are considering a recontribution.

What is your TBA “cap space” and Personal TBC?

Your “cap space” is the difference between your Personal TBC (the lifetime total amount of superannuation in retirement phase) and your TBA (the account which keeps track of debits and credits arising from Transfer Balance Account Reporting Events). For example, excess withdrawals above your annual minimum pension amount are often treated as pension commutations which would be a debit to your TBA, which then increases your cap space and therefore makes room for more superannuation in retirement phase. However, if those excess withdrawals have been classified as pension payments as opposed to pension commutations, then the former does not have any impact on your TBA and therefore does not change your cap space.

Another hidden trap is just because your cap space is the same or higher than your intended recontribution amount, you still need to ensure you’re able to make the NCC subject to the contribution caps and work tests outlined below.

Understanding your NCC cap for the current year

Members under the age of 75 on 1 July 2024 may ‘bring forward’ two years of NCCs subject to their Total Super Balance on 30 June 2024.

Total Super Balance as at 30 June 2024Non-concessional contribution & bring forward available starting 1 July 2024
Less than $1.66 million 3 years ($360,000)
Greater than or equal to $1.66 and less than $1.78 million 2 years ($240,000)
Greater than or equal to $1.78 and less than
$1.9 million
1 year ($120,000)
Greater than or equal to $1.9 millionNil

Don’t forget that your TSB includes superannuation monies inside your SMSF as well as any industry or retail funds that you may have, regardless of whether they are active or dormant funds.

Review your NCC history for the previous two financial years

With the increases in the NCC on 1 July 2024 it is imperative that you double-check if have already triggered the bring forward provisions in the last two financial years under the lower contribution cap amounts. For example, if in the 2022/23 financial year, you had made NCCs of $250,000 your remaining cap is $80,000 (because your bring forward was  $330,000 and not $360,000) for the 2023/24 and 2024/25 financial years subject to your TSB on 30 June of the previous financial year and your age at the time of additional contributions being made.

What is your age at the time of the re-contribution being made?

If an individual is turning 75 they can still trigger their 3 year bring forward non-concessional cap (provided they had not previously done so) and make their non-concessional contributions no later than 28 days after their 75th birthday.

What happens if I think an error has been made?

Firstly, don’t panic. If you think there has been a mistake, then it’s best to raise this with your SMSF accountant/administrator as soon as possible so they can investigate it further.

The general rule is the SMSF trustees can’t just refund the monies back to the member as if the error didn’t occur. This is because contributions cannot be rejected based on amounts anymore – it’s the age of the member that dictates whether they can accept a contribution.

Sweeping the matter under the carpet until the annual financial statements and tax return are being audited up to one year later is not a good idea. By doing so, valuable time is lost especially if steps need to be taken to rectify an error which may involve penalty tax on Excess Transfer Balances of up to 30% as well General Interest Charge (currently at 11.38%) on the earnings component.

As always, if you have any queries in relation to any of the above, please contact your client manager to discuss and work out what the best plan is.

Author: Anna Wong – Premier SMSF Solutions

*Correct as of 28 October 2024

*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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