Most couples prefer not to think about ‘splitting.’ But, as the financial year ends, there is one form of splitting that happy couples can safely think about.
Superannuation members could use something known as ‘contribution splitting.’ Contribution splitting is where one member of a couple transfers some of their benefits into their spouse’s super account. Depending on differences between the members of a couple, this can provide various additional benefits.
Australia’s super system lets a member of a fund transfer some or all of their annual concessional super contributions into their spouse’s account. Concessional contributions are contributions which are taxed in the hands of the super fund upon arrival. This usually means that they are tax-deductible for the person making the contributions.
The compulsory 9.5% of salary or wages that most employees have paid into their super is a form of concessional contribution. But concessional contributions are not limited to this 9.5%. Employees who receive the 9.5% can make additional contributions up the annual limit of $25,000. People who do not receive the 9.5% (for example, self-employed people) can also generally make concessional contributions up the annual limit of $25,000. (There are various other ‘qualification rules’ here – so please talk to us before making a personal contribution yourself).
Concessional contributions are taxed at 15% when they arrive into the fund. Where a person’s (non-super) personal taxable income is greater than 15%, this can mean that the tax saved in their personal name is greater than the tax paid by the super fund. Taken together, less tax is paid. This is, of course, the main reason that people make personal concessional contributions at all.
Once the member’s fund has paid the 15% tax, the remaining 85% can be transferred to their spouse’s super account. To make this happen, the member needs to notify their fund – although it always makes sense to do that as early as possible. Contributions can only be split in the year immediately after they were made. This means that, as of 1 July this year, contributions for the 2018/2019 financial year will need to stay where they are if the member has not already transferred them.
Moving benefits from one member of a couple to the other can create some advantages for the couple overall. One potential advantage is to reduce the balance of the larger account (between the couple). Having a lower super balance can have benefits, such as the ability to ‘average’ the annual $25,000 cap for concessional contributions over several years (this facility is only available to people whose super balance is less than $500,000).
Another benefit is to ‘bring forward’ or defer the point at which benefits become eligible for release. Generally, super must remain within a complying fund until the member reaches their preservation age. An older spouse will reach this age sooner, and thus splitting contributions into the account of an older spouse can bring forward the date of release for the funds.
On the flip side, in order to maximise Centrelink benefits a person might want to split contributions into the account of a younger spouse for whom release is further away. This can mean that those benefits will not then be counted towards the assets test (the age difference needs to be substantial in this case).
There may be other benefits to splitting as well. These include some things that are sometimes overlooked, such as using super to purchase life insurance for a member of the couple who may not be working.
To be eligible for super splitting, the recipient needs to be younger than the relevant preservation age (this varies depending on your date of birth). Both people need to be a member of a couple for super purposes – which includes both formal marriages and de facto relationships.
You also need to be members of funds which allow the split to occur. Splitting is generally easiest if you are members of the same fund (perhaps especially if you are members of the same self-managed super fund or SMSF). But it is also possible if you are members of different funds – although make sure you leave enough time for the transfer to actually occur.
Getting it right
As with all things superannuation, there is documentation that must be completed and rules that must be complied with. The time at which the split occurs, the type of benefit to which it applies and the process for transferring the money can all vary according to your specific situation.
So, if you think splitting might make sense in your case, please talk to us and together we can make sure your super is doing what you want it to do.