The upside of spouse contribution splitting
Superannuation was a key feature of this year’s Federal Budget and the breadth and complexities of the proposed changes are creating confusion for many consumers. Although many details around the proposals are not certain, most of the principles driving the changes are very clear and it’s a good idea for super fund members to assess the potential implications and prioritise their actions for pre-30 June 2016.
Regardless of who wins the election, super fund members should expect that very high balance accounts are likely to face additional tax liabilities, and for couples, this highlights the importance of balancing the amounts of super that each person has in their name.
There is something you can do today
At least for couples there is, and it is called spouse contribution splitting. This strategy involves concessional contributions, such as employer, salary sacrifice or self-employed contributions made in the current 2015-16 and previous 2014-15 financial years. These eligible concessional contributions may be transferred into a spouse’s super account, which may help some remain under the proposed $1.6 million limit.
For example, James has $1.64 million held between superannuation and pension accounts but spouse Alex has only $300,000. Under the proposed pension transfer limit, if no changes are made then James is likely to incur tax in retirement whereas Alex will not. If James exercised the spouse splitting contribution strategy and transferred $40,000 to Alex’s account from both the 2014-15 and 2015-16 financial years (subject to eligibility criteria), James and Alex would fall below the $1.6 million cap which means they wouldn’t have to pay tax on earnings.
Couples should review their finances together, as the strategy will also benefit pre-retirees whose account balance is currently below $1.6 million but likely to get close in the future. Within a SMSF, investments do not need to be sold to action the split; it is implemented with the assistance of the fund accountant through a combination of trustee minutes and accounting records.
There are a few things to consider before acting:
- If the spouse receiving the transfer or split of contributions (the receiving spouse) is a lot younger it may not be worthwhile, as the super may then be moved into an environment where it will be preserved for longer.
- If the receiving spouse has a very high income and this is expected to continue for over a longer period, the benefits might be temporary or minimal as they are also more likely to be subject to the high account limits in the future.
- If either spouse is on age pension or social security benefits (other than Commonwealth Seniors Healthcare cards) this strategy is generally not advisable.
- When the split is actioned, the amount will be held in the account of the receiving spouse who has the ability to withdraw the funds subject to their preservation age and condition of release.
- If you would like to claim a tax deduction in respect of the self-employed contributions to be split to your spouse, you must lodge a notice of intent to claim a tax deduction with your super fund prior to submitting the spouse contribution splitting application.
Who can do it?
The spouse receiving the transfer or split of contributions must be under age 65 and not retired. The concessional contributions made in the 2014-15 or 2015-16 financial year must still be held in the accumulation account – that is, they have not otherwise been withdrawn, rolled over to another fund or converted into a pension.
How much can be split?
Whichever is lesser of 85 per cent of the actual annual concessional contributions made, or the allowable concessional contribution limit – which might only represent up to $25,000- $35,000 that can be moved each year – but every little bit counts.
What is the deadline?
Your application can be lodged with your super fund in the financial year immediately after the one where the contributions were made. This means you have until 30 June 2016 to take advantage of 2014-15 contributions. Requests to split 2015-16 concessional contributions should be submitted from 1 July 2016. Please be aware that spouse splitting applications must be made prior to an individual’s benefit being withdrawn as a rollover, transfer, lump sum benefit or combination.
The next steps
Contributions for the 2014-15 financial year may still be split, but members must submit an application to the trustees of their SMSF before 30 June 2016. If you would like further information to help you assess the benefits and risks of this strategy, it’s a good idea to talk to a qualified Financial Advisor.