Contribution splitting rules are a super benefit for women and pre-retirees
Contribution splitting rules are one of the benefits for couples with a superannuation fund, including SMSFs. And, now may be the time to look at balancing the amounts of super in each of your names to take advantage of the opportunity.
Spouse contribution splitting involves transferring concessional contributions, such as employer, salary sacrifice, or personal deductible contributions made in the current 2017-18 and previous 2016-17 financial years to your eligible spouse’s super account. Transferring super this way is generally attractive for two key groups of people.
Contribution splitting rules can help keep women on track for retirement
For women who have taken an employment break or dropped back to part time work, contributions to super can slow dramatically – meaning by retirement, the super gap can be significant. Therefore, looking at contribution splitting is a clever option because it can allow both members of the couple to keep their account balances growing. Best of all, you don’t need to find any extra cashflow in the household to put this strategy in place. It can be as simple as transferring part of the highest income earner’s employer superannuation guarantee contributions to the lower earner’s super account each financial year. This keeps both partners actively engaged in the household finances while benefitting from the confidence that accumulates as they build their knowledge and experience dealing with the complex world of super.
High income earners can utilise contribution splitting rules to support their spouse tax free
Contribution splitting will also benefit high income earning and pre-retirement couples where one member of the couple’s super account balance is expected to exceed $1.6 million. The 2017 super reforms mean if you and your spouse can plan ahead – as a couple you can hold $3.2 million tax free at retirement. But because balances are often skewed to one partner, they may end up paying some tax in retirement even if their spouse is well under the $1.6 million individual limit. For these couples, being able to transfer – or contribution split – the maximum annual amount could help them to optimise the individual limits and increase the amount of money that can be held tax free at retirement.
Contribution splitting creates a more tax effective set-up for retirement
By splitting super evenly, each spouse is more likely to stay under thresholds where additional taxes on earnings may be levied. For example, James has $1.62 million held in his superannuation account, but his spouse Jenny has only $300,000. Under the current pension transfer limit, if no changes are made then James is likely to incur tax in retirement whereas Jenny will not. If James exercised the spouse splitting contribution strategy and transferred $21,250 to Jenny’s account for the 2017-2018 financial year (subject to eligibility criteria), they would both have benefits below the $1.6 million cap – this means at retirement no tax is payable on the earnings for either of them.
Contribution splitting rules explained - the who, how and what?
Who can take advantage of contribution splitting rules?
The spouse receiving the transfer or split of contributions must be under age 65 and not retired. The concessional contributions made in the 2016-2017 or 2017-2018 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 of the spouse’s super 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 85 per cent of $25,000 that can be moved each year – but every little bit counts. Within a SMSF, investments do not need to be sold to action the split; it is implemented with the assistance of the fund’s accountant through a combination of trustee minutes and accounting records.
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 2018 to request a transfer of the 2016-2017 contributions. Requests to split 2017-2018 concessional contributions should be submitted from 1 July 2018.
Six key considerations for spouse contribution splitting
- When the contribution split is actioned, the amount will be held in the receiving spouse’s account 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 personal deductible 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 in the financial year immediately after the one where the contributions were made – or to the trustees of your SMSF. Spouse splitting applications must be made prior to an individual’s benefit being withdrawn as a rollover, transfer, lump sum benefit or combination.
- If the receiving spouse is a lot younger, it may not be worthwhile, as the super may then be moved into an environment where it is 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.
- Check you super fund to see what fees may be charged with implementing this strategy.
Find out more on the ATO website or speak to your financial advisor to ensure you make the most of your hard-earned assets before the new financial year.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward-looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.
Interested in learning more?
Need more information?
It’s important to have the knowledge you need to make an informed and confident decision about your retirement savings.