With the new $1.6 Million pension “transfer balance cap” coming in from 1 July 2017, it’s going to become increasingly important now and in the future to even out your superannuation member balances with your spouse, particularly where one member is working more than the other.
A strategy that should be considered by most couples to achieve more equal balances is contribution splitting. With this strategy, given the limited amount that can be split every year, it will be important for younger couples to start on this path earlier if it is to make a significant difference to their balances.
How does contribution splitting work?
Contribution splitting involves one spouse transferring contributions made in respect of them into a superannuation account for their spouse.
Broadly, concessional contributions can be split, such as employer contributions and personal contributions in respect of which an income tax deduction has been claimed. You cannot split non-concessional contributions.
It’s also important to note:
- Only 85% of the concessional contributions can be split to recognise the fact that the superannuation fund has paid 15% tax on that contribution in that year.
- Splitting contributions does not affect or change each member’s concessional contribution limits, so each spouse still has one concessional limit each.
- The receiving spouse cannot be aged 65 or more, or between their preservation age and age 65 where they satisfy the ‘retirement’ condition of release.
- You are only able to split contributions from 1 July in respect of the contributions made in the previous year up to 30 June.
- The ability to split contributions is dependent on the SMSF trustee being permitted to be able to do so under the trust deed.
- An ATO “Superannuation contributions splitting application’ form needs to be completed and kept on the SMSF file (or sent to the super fund if the fund is not an SMSF). This form usually does not need to be lodged with the Australian Taxation Office.
This strategy is available for retail, corporate, industry or Self-Managed Super Funds but the administration and communication required to establish it may vary, along with deadlines for when the choice to split contributions can be made.
Example of super splitting over the long term
Sam & Mary are members of the M & S Superannuation Fund (SMSF). Both members are 45 years old. Sam has an account balance of $1,000,000 and Mary’s balance is $500,000 at 30 June 2016.
For the next 10 years Sam makes the maximum concessional contributions allowable under the limits (i.e 30,000 for 30 June 2017 then $25,000 per year thereafter) which is then split to Mary every year. The table below shows the results.
| With Contribution Splitting | Without Splitting | ||||
| Sam | Mary | Sam | Mary | ||
| $ | $ | $ | $ | ||
| 30-Jun-16 | 1,000,000 | 500,000 | 1,000,000 | 500,000 | |
| 30-Jun-17 | 1,048,723 | 551,828 | 1,075,550 | 525,000 | |
| 30-Jun-18 | 1,095,581 | 606,246 | 1,150,578 | 551,250 | |
| 30-Jun-19 | 1,149,298 | 658,871 | 1,229,356 | 578,813 | |
| 30-Jun-20 | 1,205,700 | 714,127 | 1,312,074 | 607,753 | |
| 30-Jun-21 | 1,264,923 | 772,146 | 1,398,928 | 638,141 | |
| 30-Jun-22 | 1,327,106 | 833,066 | 1,490,124 | 670,048 | |
| 30-Jun-23 | 1,392,399 | 897,032 | 1,585,881 | 703,550 | |
| 30-Jun-24 | 1,460,956 | 964,196 | 1,686,425 | 738,728 | |
| 30-Jun-25 | 1,532,942 | 1,034,718 | 1,791,996 | 775,664 | |
| 30-Jun-26 | 1,608,526 | 1,108,766 | 1,902,846 | 814,447 | |
| 30-Jun-27 | 1,687,890 | 1,186,517 | 2,019,238 | 855,170 |
Assumptions
- Opening balance at 30/6/16 includes Sam’s concessional contribution (less 15% tax) in the balance
- Earnings of 5% after tax per year on both balances
- Mary does not make concessional or non-concessional contributions
- Sam does not make any non-concessional contributions.
As you can see from the above example, by super splitting every year Sam was able to effectively transfer approximately $331,000 from his balance to Mary’s balance over the 10 year period in question.
This would mean in future (as Sam is already over $1.6 Million but Mary is under) that this $331,000 amount will be in a tax free environment (when they start account based pensions) rather than the earnings being taxed at 15%. If for example that $331,000 earned 5% every year, that would be a tax saving of approximately $2,483 per year when the fund is at pension stage.
As with many superannuation strategies, you should carefully consider your goals and circumstances and seek professional advice. Accru specialises in superannuation and retirement planning. Please contact your local Accru adviser if you require assistance or clarification on the strategy above.