Splitting your super contributions
- You can split up to 85 per cent of your annual concessional contributions with your spouse
- In the right circumstances it can be a profitable strategy, but there are pros and cons
- We explain the steps involved
Contribution splitting has been around since 2006 and we suspect it’s a strategy that’s underutilised. As the name suggests, the rules allow you to split your superannuation contributions with your spouse, effectively shifting some of your super balance to them.
We’ll explain why you might do this and how, but first let’s explain the rules.
Contribution splitting explained
It’s important to note that the fund’s trust deed needs to allow splitting. If it does, you can split up to 85 per cent of your concessional contributionsThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information. with your spouse (including compulsory, salary sacrificed and other voluntary contributions), even if they’re also making contributions. However you can't split more than the annual concessional contributions capThe annual cap (for each year ended 30 June) on the amount of concessional (pre-tax or tax deductible) contributions a person is allowed to contribute to super. For more information on cap amounts see the ATO website. (if you make excess contributions).
You’ll qualify for splitting if you’re married, in a defacto relationship (including same-sex couples) or your relationship is registered under a state or territory law. Your spouse must also be under their preservation ageThe age at which you can generally access your super (subject to satisfying a condition of release). A person's preservation age depends on their date of birth. For those born before 1 July 1960 it's 55, but it will gradually increase to 60 over coming years. See the ATO website for more information. or, if they are above it, be under the age of 65 and not ‘retired’ (for superannuation purposes).
Contribution splitting happens after the fact. You make contributions to your super fund during the year and you have until 30 June of the following year to transfer them to your spouse. But you can only split once each year.
That’s what contribution splitting is. When can it be a good idea?
The case for contribution splitting
There’s some specific advantages you get from splitting (more below) but one of the main benefits is a more general one: ‘future proofing’ your super.
One of the mooted changes to super is a ‘pension tax’ aimed at larger super balances, or higher levels of income. The previous Labor Government proposed taxing income above $100,000 a year and, while it didn’t proceed, current Labor policy is to tax the annual earnings of pension mode super accounts above $75,000.
That’s not to say it’s only an issue if Labor regain power. We suspect budgetary pressures will force the hand of the Coalition down the track.
A way for couples to minimise their overall exposure to such a tax (or any other change targeting large balances) is to spread their super as evenly as possible. Circumstances (for instance, one spouse not working, or earning a lower income) don’t always provide for equal super balances, so super contribution splitting is a way of evening things up.
Unfortunately, the amount that can be split is subject to an annual limit; you can’t just transfer a big chunk of your super balance if you’re affected by a future change in law. So you need to ‘future proof’ your super now by splitting your annual contributions in favour of the spouse with the lower balance. Fortunately, it’s a simple, relatively costless, exercise to undertake (more below).
Contribution splitting isn’t just about future proofing; in the right circumstances there can be specific benefits:
- Accessing the lump sum low rate (tax-free) threshold. If you’ve reached your preservation ageThe age at which you can generally access your super (subject to satisfying a condition of release). A person's preservation age depends on their date of birth. For those born before 1 July 1960 it's 55, but it will gradually increase to 60 over coming years. See the ATO website for more information., but you’re under the age of 60, you’re taxed on (the taxable component of) lump sum withdrawals. But everyone is entitled to a ‘low rate threshold’ ($195,000 for the 2015/16 year) that allows them to withdraw a lump sum (up to the threshold) tax-free. If one member of a couple has a balance lower than this, the tax-free threshold goes to waste. Contribution splitting is a way of increasing the balance of the smaller account, allowing a couple to use more overall tax-free threshold. (See our earlier article Increasing your tax-free super: The re-contribution strategy for more on utilising the low rate threshold).
- Paying insurance premiums for non-contributing spouse. You can use super splitting to pay your spouse’s life, income protection and TPD insurance premiums through super. Liam often uses this strategy where one spouse is working to establish a new business and there’s a lack of cash flow to pay premiums.
- Increasing age pension entitlement of older spouse. If there’s a large age difference between couples, it can make sense to shift super to the younger spouse. The age pension Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. excludes your spouse’s super while it’s in accumulation mode. In this case, splitting super in favour of your spouse may allow you to access the age pension (or a higher age pension) and the Commonwealth Seniors Healthcare Card until they starting taking a super pension. This is often an essential strategy for those with medical issues, on the cusp of qualifying for the age pension. But if you’re thinking about splitting contributions for this reason you need to consider the negatives as well (more below).
- Accessing tax-free income sooner. We often say the right strategy depends on your circumstances and super splitting is a great example. In some cases it makes sense to split in favour of the younger spouse but in others it might be better to shift super to the older person. If you’re a lot older than your partner and approaching age 60 (when you can withdraw super tax free), you might benefit if they split contributions in your favour, especially if you’ve still got a mortgage (and even more so if the interest isn’t tax deductible). Shifting super to the older partner gives you greater access to cash (both lump sums and ongoing pension payments) or may simply mean you have more super overall in (tax-free) pension mode.
If you’re considering splitting contributions it’s a matter of weighing up the pluses and minuses of each strategy. If you won’t qualify for the age pension and the younger partner has the larger balance it can make sense to split in favour of the older person. But if the older spouse will get the age pension and the younger person has a small balance, the benefit of splitting to the older spouse and accessing greater cash flow may be offset by loss of age pension and the risk of a future pension tax hitting the larger balance.
If you're having trouble working out the financial impact of each approach, we suggest speaking with a Centrelink Financial Information Services officer (phone 132 300) and, if necessary, seeking personal advice. Even if you don’t regularly use a financial adviser, the period leading up to you or your spouse starting a pension can be a very good time to seek one-off advice on your options (Premium Members can access our Personal Advice service here).
If you’ve decided to split contributions, the steps involved are fairly simple. But an important point to remember, if you’re making a contribution you’re planning on deducting in your tax return, is that you must first submit a ‘Notice of Intent to Claim a Deduction for Super Contributions’.
Once you’ve done that, or if it’s unnecessary (which would be the case for those with only employer or salary sacrificed contributions), the steps involved for an SMSF are:
- Inform your trustee. Send the Contribution Splitting Form to your SMSF trustee(s). This sets out the required information including the amount you wish to split to your spouse’s account and the relevant financial year.
- Minute the request. We recommend the trustees pass a written resolution or hold a meeting (documented with a minute) approving the request. Here’s some example wording for an approval: 'The trustees having received a valid request for a superannuation split from [member’s name] to [member’s name] and confirming this is allowed by the Trust deed accept the request and will advise the administrator to implement the split.’
- Tell your administrator/accountant. Once approved, let your administrator or accountant know that the financials need to reflect the split.
If you’re a member of a retail or industry super fund they’ll probably have their own process and forms for documenting a contribution split (see, for example, Australian Super’s). You may also have to pay a fee (Australian Super charge $70).
Contribution splits are done after the relevant financial year has ended, although there’s an exception if you’re rolling over, or cashing out, your entire balance (in which case you can do the split at that time).
In the right circumstances super contribution splitting can be a useful strategy, just be sure to account for all the pros and cons of the course of action you intend to take.
Liam Shorte is a principal of Verante Financial Planning Pty Ltd (www.verante.com.au), a corporate authorised representative of Magnitude Group Pty Ltd (AFSL 221557). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.
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