A common investment strategy aimed at reducing tax is to withdraw money from an SMSF then contribute it back into a tax-exempt segment of the same fund.
This strategy was particularly common before July 1, 2007 when changes made it impossible to selectively withdraw the taxable components of a super fund. However, the recontributions strategy is still useful for those who are able to take a pension under 60 years of age. For those over the age of 60, pension withdrawals are tax-free.
Meet Tom, age 56
Let's look at an example. Suppose Tom Smith, age 56, is fully retired and has $1.5 million in super assets. Let’s assume this entire amount is a 'taxable component'. (In general terms, all super benefits are split between tax-free and taxable components. Super fund trustees have to calculate these components for each benefit that is paid. For more on this, please read our segment on How your SMSF is taxed.)