Splitting concessional contributions with your spouse may offer tax savings as well as earlier access to super.
But first you have to understand the rules and decide whether it’s worth doing.
A fund member can split up to 85% of their concessional contributions up to their cap each year. For 2016-17 the cap is $35,000 for those over 50 and $30,000 for younger members. It includes employer and salary sacrifice contributions.
CareSuper says couples use contribution splitting for two main purposes: to take advantage of the lower tax thresholds that may apply when drawing down a super benefit between age 55 and 60; or to access super earlier by redirecting contributions to an older spouse.
For instance, if a couple is thinking of retiring before 60 and taking all or part of their super as a lump sum, a splitting strategy would enable both spouses to take advantage of the low-rate tax threshold and withdraw the first $195,000 of the taxable component of the benefit tax free.
“If you are going to access your super between 55 and 60, only the first $195,000 is tax free,” says Laura Menschik, a financial planner and director of WLM Financial Services. “By splitting the contributions to boost the receiving partner’s balance, a couple can increase their tax savings.”
Similarly, if the contributions are redirected to a spouse who is able to access their super earlier, taking a lump sum to pay off the mortgage or other debts may prove beneficial, says Menschik. But it requires some forward planning.
“With most people their goal on retirement is to be mortgage free and debt free. Using super splitting in that regard to pay off the mortgage is a good strategy,” she says, providing the following example.
“The husband, 64, is still working full-time. The wife was a stay-at-home mum, then worked part-time and didn’t have the capacity to top up her super. For the past five years they’ve been splitting his super up to 85% of the contributions to go off to her account. The wife, also 64, no longer works so she’s met the condition of release. She can access her super tax free as a lump sum to pay off the mortgage.”
Now that tax-free pension accounts are to be capped at $1.6 million from July 1, Menschik expects more couples will consider the strategy so they can even out their account balances “to keep them within that limit and keep their money within a tax-free environment”.
To split your super you will need to ask your fund for the necessary paperwork, including a statement showing the concessional contributions you received in the previous financial year.
You can only split contributions made in the previous financial year. However, you can request a split for the current financial year if your benefit is to be rolled over, transferred to another super fund or paid out.
Not all funds permit super splitting, or they may allow it only if your spouse opens an account with the same fund. They may also apply minimums – for instance, a minimum split of $1000 – or refuse if it results in your account balance falling below, say, $5000.
“People have to check with their super fund that they can do it and that it can be received by their spouse’s fund. Some funds will only do it if the spouse opens a new account with them,” says Menschik.
Only concessional (before-tax) contributions can be split. You can split your super regardless of your own age but your spouse must be:
• Less than their preservation age (55 for those born before July 1, 1960) whether working or not.
• Or between their preservation age and 65 and not retired.
• Contributions cannot be split with a spouse who is over 65.