Divide and Conquer - Eureka Report article
Divide and conquer
By Scott Francis June 15, 2011
PORTFOLIO POINT: Splitting superannuation contributions could be making a comeback with looming rule changes.
Superannuation contributions splitting – where one member of a couple transfers superannuation assets to another on an annual basis – is about to stage a comeback.
Contributions splitting became less popular when all superannuation withdrawals for over-60s were made tax-free. I expect that to change: the new rules surrounding super, which restrict the benefits available to trustees from 2012-13, are likely to make contributions splitting attractive again.
With all superannuation withdrawals tax-free, there was no longer an advantage for two members of a couple to have equal superannuation balances; it did not matter whose name superannuation assets were in because you could withdraw as much as you want from either person without paying any tax.
However, the ability for people with lower superannuation balances (under $500,000 for people over the age of 50) to make higher levels of tax-effective contributions from 2012-13 might see couples using contributions splitting to keep the superannuation balance of the higher income earner at lower level – allowing them to save more tax by making more superannuation contributions.
The statement that is of interest to superannuation investors, with regard to superannuation contributions splitting, can be found on the ATO website:
“The government has announced changes that, if passed by parliament, will permanently increase the concessional contributions cap to $50,000 for individuals who have total super balances below $500,000 and are 50 years old or over. We will publish updated guidance if these announced changes become law.”
Clearly the statement from the ATO has some uncertainty about it: these changes will have to pass through parliament before they are law. However, the rules that allow superannuation contributions are already in place and, for most people, there will be little downside risk in splitting their contributions with their partner, meaning that it is a strategy worth considering immediately.
Let’s consider the value of a superannuation contributions strategy to a couple who are both aged 50 and where one partner earns a wage of about $92,000 a year, and the other is working part-time and earning $30,000 a year.
The higher earner will be receiving superannuation contributions equal to 9% of their income ($8280 a year). Being aged 50 they might be at a stage where they have paid off all or most of their mortgage, and are looking to maximise their superannuation contributions.
If the higher earner has a super balance of $500,000 or more, they will be limited to employer and salary sacrifice contributions of $25,000. This means they will only be able to salary sacrifice a further $16,720 after employer contributions of $8280. This is still not a bad strategy: they will pay $2508 of superannuation contributions tax on the $16,720 of salary sacrifice contributions, compared to $6107 of income tax and Medicare levy – a tax saving of about $3600 a year.
This tax saving can be increased to a far more impressive $7723 a year (or nearly $140 a week) if they have a superannuation balance of less than $500,000 and increase the total of their employer and salary sacrifice contributions to $50,000 a year. Under this scenario they still receive $8280 from their employer, but can now make salary sacrifice contributions of $41,720 a year. These salary sacrifice contributions will attract tax of $6258 a year compared to $13,982 of income tax and Medicare levy if this $41,720 was taken as income.
The question then is: How can the higher income earner in a couple keep their superannuation balance low? The answer is superannuation contributions splitting.
At a practical level, every superannuation fund (including SMSFs) are able to offer superannuation contributions splitting, but not all do.
The first step, then, in a superannuation contributions splitting strategy is to check whether your fund offers this, or your self-managed super fund trust deed allows it. If the answer is no, don’t give up – not all is lost: you can always switch super funds or amend your trust deed.
Contributions splitting will most commonly be done in the financial year after the contributions are made. This might even give some people scope to split their 2010 contributions – although clearly time is limited and the process could take a while to complete.
Not all contributions can be split, although the most common ones can be including:
The most common contributions that can’t be split are personal contributions (that is contributions of your own money).
The following table, from the ATO, outlines exactly which contributions can be split and which cannot:
Type of contribution Splittable?
A secondary reason to consider contributions splitting is to protect against any legislative change in the future that might see superannuation income streams being taxed again. If this were to happen it might be advantageous for couples to have relatively equal superannuation balances, so that the couple’s income was split between two-tax free thresholds and lower tax brackets.
A final, although relatively minor, point in favour of income splitting is that if both members of a couple have roughly equal superannuation balances and one member passes away, then the surviving member has access to superannuation in their own name during the period of time that the other partner’s estate is being finalised.
A word of warning: if you are thinking of implementing a superannuation contributions strategy it is worth keeping in mind any Centrelink impacts that the strategy might have, especially if there is a difference in age between the members of a couple. There may be Centrelink benefits in keeping superannuation assets in the name of the younger member of the couple so they are not assessed as an asset for the assets test for longer.
There is no doubt that superannuation is a great wealth-creation vehicle, and salary sacrificing to superannuation is a powerful strategy. Given that changes are coming – that will limit over-50s, with super balances of more than $500,000 from making tax-deductible contributions of more than $25,000 a year – then using superannuation contributions splitting to manage superannuation balances is likely to be an increasingly important strategy.