The re-emergence of superannuation contribution splitting

21 March 2018

Older woman looking into garden and contemplating superannuation contribution splitting

Fabian Bussoletti

Fabian has more than 20 years’ experience in the financial services industry. Since 2000, Fabian has been one of AMP’s technical experts, supporting financial advisers to keep up-to-date with changing regulations and requirements.

Using contribution splitting as part of a strategy to even up spouse superannuation balances in retirement, must be considered proactively as part of pre-retirement planning.

This article is for educational purposes only and is no longer available for CPD hours.

Since its introduction, the popularity of contribution splitting has varied due to significant changes to superannuation.

However, it is likely to receive renewed interest due to the introduction of the:

  • $1.6 million pension transfer balance cap (TBC); and
  • the concept of total superannuation balance (TSB), which will be used to assess an individual’s eligibility to make non concessional contributions from 1 July 2017, and catch up concessional contributions from 1 July 2019.

As contribution splitting only enables the splitting of superannuation contributions, superannuation balances cannot be split. Therefore, using contribution splitting as part of a strategy to even up spouse superannuation balances in retirement, must be considered proactively as part of pre-retirement planning, rather than reactively at retirement.

Note: Throughout this article, the spouse who is the recipient of the contribution splitting benefit is referred to as the receiving spouse. The spouse who is making or has received the original contribution(s) that will be split is referred to as the contributing spouse.

Benefits of contribution splitting

Contribution splitting can result in several advantages for a couple, some of which are discussed below.

Maximising concessionally taxed or tax-free lump sum super withdrawals

Splitting contributions may allow contributions to be accessed tax-free earlier than what might otherwise be possible if they remained in the contributing spouse’s fund. For example, a client aged 50 might split contributions with their spouse aged 57. The receiving spouse will reach age 60 in only three years’ time and, if they meet the retirement condition of release at this time, lump sum super withdrawals will be received tax-free (from a taxed fund).

Contribution splitting also offers a couple the ability to access two low-rate cap thresholds on lump-sum withdrawals, which include a taxable component, where the withdrawals are made on or after reaching preservation age, but prior to age 60. This doubles the tax-free amount that can be withdrawn by such couples as a lump sum to $400,000 (i.e. 2 x $200,000) in the 2017/18 financial year.

Utilising this low rate cap can be useful, for example, when undertaking a re-contribution strategy to improve the tax-effectiveness of an account based pension prior to age 60.

Total super balance limits

Contribution splitting can also assist in reducing the TSB of one member of a couple. This is particularly relevant from 1 July 2017, as an individual’s ability to make non concessional contributions (NCC) can be affected by their TSB as outlined below:

  • The full $300,000 bring-forward provision cannot be used in a financial year where an individual’s TSB was between $1.4 million and $1.599 million on 30 June the preceding financial year.
  • No NCCs can be made in a financial year where the individual’s TSB was $1.6 million or more on 30 June of the preceding financial year.

Contribution splitting can be used to divert contributions (and earnings on those contributions) that would otherwise form part of the contributing spouse’s higher TSB, away from them and to the receiving spouse’s lower TSB.

An individual’s TSB will also be relevant to those wishing to take advantage of the ability to carry forward unused concessional contributions, which commences 1 July 2018. In order to use these provisions and make a carried forward contribution, the client must have TSB of less than $500,000 on 30 June in the preceding financial year.

Pension transfer balance cap

The $1.6 million TBC limits the total amount of super benefits that an individual can transfer into tax-free retirement phase.

By using contribution splitting, superannuation balances can proactively be evened up between members of a couple, meaning that a greater percentage of wealth in retirement can be held in the tax-free pension environment.

Example 1

At retirement, Alena, age 65, has $1.9 million in total super, whilst her husband, Rudiger, also aged 65, has $500,000. This would result in $300,000 of Alena’s retirement funds needing to remain in accumulation, where the earnings will be taxed at 15 per cent, or be withdrawn and invested outside super and taxed at marginal tax rates.

If, due to proactive longer term planning, which included spouse splitting, Alena’s balance was instead $1.5 million and Rudiger’s was $900,000 at retirement, then 100 per cent of these funds would be in the tax-free retirement pension phase. This is despite the total super wealth across the couple being identical in both scenarios.

Sheltering superannuation for social security purposes

Splitting contributions to a spouse who is under Age/Service Pension age may increase pension entitlements, as super assets of the younger spouse are not assessed when in accumulation phase while they are under Age/Service Pension age.

Note: As an alternative to contribution splitting, maximising this strategy can also be achieved by cashing out super from the social security recipient spouse and contributing into the name of the younger spouse. However, the lower non-concessional contribution caps may limit the effectiveness of how much can be contributed.

Earlier access to contributions

Splitting contributions to an older spouse may allow super benefits to be accessed earlier under the retirement condition of release or reaching age 65.

For example, a person age 50 on 1 July 2017, has a preservation age of 60. Their spouse, age 55 on 1 July 2017, has a preservation age of 58 and can therefore access preserved benefits two years earlier if retired.

How does contribution splitting work?

All types of accumulation superannuation funds (including SMSFs) are able to offer members an option to split concessional contributions to their spouse. However, there is no legal obligation for the fund to offer contribution splitting.

What contributions can be split?

Only concessional contributions can be split to the receiving spouse. This includes employer contributions (e.g. SG and salary sacrifice) and personal deductible contributions.

What contributions cannot be split?

After tax contributions cannot be split. This includes:

– personal contributions for which a tax deduction has not and will not be claimed;

– spouse contributions;

– contributions made by someone, other than an employer, for someone who is less than 18 years old;

– contributions that have been counted against the small business capital gains tax cap;

– contributions that have been counted against the personal injury payment cap; and

– the government co-contribution.

Further, the following amounts also can’t be split:

– a contribution that has already been subject to a superannuation contribution splitting application;

– rollovers;

– transfers from overseas superannuation funds;

– contributions for someone who is a temporary resident at the end of the financial year in which the contribution is made; and

– contributions to a superannuation interest that is subject to a payment split or on which a payment flag is operating under the family law provisions.

How much can be split?

The amount of concessional contributions that can be split depends on whether the contribution(s) have been made to a taxed or untaxed fund.

Contributions to taxed super funds that can be split are referred to as taxed splittable contributions. The maximum amount of taxed splittable contributions is the lesser of:

– 85 per cent of the concessional contributions for a financial year; and

– the concessional contributions cap or the financial year.

Some public sector superannuation schemes that are untaxed funds may also allow their members to split a portion of their concessional contributions with their spouse. These contributions are referred to as untaxed splittable contributions.

A member of such a super fund can split 100 per cent of their untaxed splittable contributions for a financial year if they don’t exceed their concessional contributions cap for that financial year.

Eligibility for contributing spouse

So long as the contributing spouse can make concessional contributions, technically the contribution(s) can be split. To make salary sacrifice or personal deductible contributions, the contributing spouse needs to either be under age 65 or aged 65 to 74 and meet the 40 hour/30 day work test. Legally mandated Superannuation Guarantee contributions can be made regardless of age.

Members of defined benefit super funds are not able to split contributions that fund their defined benefit interest. However, they may be able to split contributions that fund a separate accumulation interest.

Eligibility requirements for the receiving spouse

Eligible contributions can only be split with a person’s spouse. Spouse, for this purpose, includes:

– a person, who although not legally married to, lives with the contributing spouse on a genuine domestic basis in a relationship as a couple; and

– another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a State law or Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section.

While all members of accumulation style super funds who are eligible to make or receive superannuation contributions can split eligible contributions, the receiving spouse will need to be either:

– under preservation age; or

– preservation age to 64 years old and not yet retired.

Once the receiving spouse reaches age 65, they will no longer be eligible to receive a contribution splitting benefit.

The above restrictions stop eligible contributions from being split to a spouse who can then immediately access them.

A receiving spouse who is not yet 65 years old can receive a super contribution splitting benefit where they satisfy a condition of release other than retirement, such as permanent incapacity or severe financial hardship.

When can a super contribution splitting application be made?

To be valid, a superannuation contribution splitting application must be made in:

– the financial year immediately after the financial year in which the contributions were made; or

– the financial year in which the contributions were made, if the whole benefit is being withdrawn before the end of the financial year as a rollover, lump-sum superannuation benefit or a combination of the two.

If a member intends to commence a pension part way through a financial year, any amounts that are required to be split need to remain in the original member’s accumulation account until the end of the financial year.

Most super funds supply their own form for contribution splitting. If not, the ATO’s superannuation contributions splitting application form can be used. A super contribution splitting application will not be valid if any of the following apply:

– an application has already been made for that financial year and the trustee is either considering the application or has already proceeded with the split;

– the amount to be split in the application exceeds the maximum allowable; or

– the receiving spouse is either aged 65 years or over, or is aged between preservation age to 64 years old and has retired.

Once a member has elected to split a contribution, it is no longer possible to make another contribution splitting application in relation to that same contribution period.

Personal deductible contributions: Special considerations

If a member intends claiming a tax deduction for a personal super contribution, they must lodge the section 290-170 notice of intent before they lodge a contribution splitting application.

The trustee of the super fund must check the validity of the section 290-170 notice and acknowledge it, before considering a contribution splitting application. If these steps are not followed, it will not be possible to claim a tax deduction for the personal super contribution.

Contributions cap

Contribution splitting will not help a member circumvent the contributions cap.

The initial contribution by the member is assessed against their concessional contributions cap. Similarly, the liability for contributions tax remains with the original fund member and is not transferred to the receiving spouse, hence why only 85 per cent of a taxed splittable contribution can be split.

A contributions splitting superannuation benefit paid to another super fund, or transferred to an account in an existing fund for the receiving spouse, is treated as a rollover and not assessed against the receiving spouse’s contributions cap.

Case study

Kerry, who is 48 years old, had contributions from her employer of $25,000 made to an accumulation super fund during the 2016/17 financial year. These contributions will be assessed against Kerry’s concessional contributions cap.

In August 2017, Kerry applies to her super fund in the approved form to split the maximum allowable amount to her spouse, Angelo, who is 58 years old.

Prior to going ahead with the contribution splitting application, the trustee of the super fund will request a statement from Angelo confirming that he is not retired. Angelo indicates on the contribution splitting application form that, while he is 58 years old, he is still working full-time and therefore is not retired.

The trustee will transfer an amount of $21,250 (i.e. 85 per cent of $25,000) to a super account in Angelo’s name. It doesn’t matter whether Angelo’s super account is with the same super fund or not.

The splitting transaction will:

– be classified as a contributions splitting superannuation benefit;

– form part of the taxable component of Angelo’s superannuation benefit;

– not be included in Angelo’s super fund’s assessable income and hence will not be subject to contributions tax in his fund;

– not reduce the amount assessed against Kerry’s concessional contributions cap for the 2016/17 financial year; and

– will not be assessed against either of Angelo’s contribution caps.

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