The idea behind this strategy is to take advantage of the difference between the concessional tax rate on superannuation contributions and the personal marginal tax rate of the individual. Concessional contributions, such as employer contributions and salary sacrifice contributions, are typically taxed at a lower rate (15%) than the individual's marginal tax rate, which could be up to 47% (depending on the individual's income).
Here is how the strategy works in practice:
1. An individual withdraws money from their superannuation account as a lump sum.
2. They then re-contribute the money back into their superannuation account as a non-concessional (after-tax) contribution. This means that the contribution is not taxed again, as tax has already been paid on the money when it was initially contributed to the super fund.
3. The individual may then claim a tax deduction on the re-contributed amount, reducing their taxable income and therefore their tax liability.
It's important to note that this strategy is subject to certain rules and restrictions, including contribution caps, age limits, and eligibility criteria. It's important to seek professional financial advice before using this strategy to ensure it's appropriate for your personal circumstances and financial goals.