Superannuation contribution splitting is now possible as a result of a recent legislative change to the superannuation landscape. It allows a person to split the majority of each year's superannuation contributions to their spouse's superannuation account, if they wish and if their superannuation account allows it. They do this by notifying their superannuation fund at the end of each financial year.
At this stage it is not compulsory for a superannuation fund to offer superannuation contribution splitting. If your fund does not offer this, and you feel that it will improve your financial situation, you may consider moving to a superannuation fund that does offer superannuation contribution splitting. You will be able to do this if you have the right to choose your superannuation fund, as many employees now do.
Each year up to 85% of deductible contributions and 100% of personal contributions can be split. Deductible contributions are those contributions that a tax deduction has been claimed for, such as the compulsory 9% employer contributions or salary sacrifice contributions. Personal contributions, or undeducted contributions, are those that are made from a person's own money.
There are three circumstances in which superannuation contribution splitting has significant benefits. The first is in the situation where superannuation is split so that both members of a couple can withdraw up to the low-tax threshold from superannuation. The second is where one spouse has used up their RBL (reasonable benefit limit) and superannuation can be split to take advantage of two RBLs. The third is to equal the retirement income between members of a couple and therefore reduce the total tax paid.
These are explained further, one at a time.
Accessing the Low-Tax Threshold
The low-tax threshold allows a tax-free withdrawal from superannuation. If one member of a couple has a level of superannuation above the threshold, and another below the threshold, splitting superannuation contributions into the smaller account will increase the total superannuation benefit that can be withdrawn tax-free. Currently the low-tax threshold is around $130,000.
For example, let us assume that one member of a couple has $200,000 of superannuation and the other none. They will only be able to withdraw $130,000 from superannuation tax-free. However, if over time they had planned their situation and split at least $70,000 of the superannuation to the member of the couple with no superannuation, they would have been able to withdraw all $200,000 tax free. This would have provided them with a tax saving of over $10,000.
Addressing RBL (Reasonable Benefit Limit) Issues
Reasonable Benefit Limits are discussed in more detail in the last section of this book. In a nutshell they provide a limit to the amount of money that any person can withdraw from superannuation in a tax advantaged way. Currently that limit is $650,000 for a lump sum withdrawal. If a member of a couple is nearing their limit, splitting contributions to a spouse with a smaller superannuation balance may solve this problem, and allow the couple to withdraw more money from superannuation in a tax advantaged way.
Equalising Income in Retirement
It general is a smart strategy to have relatively equal income streams between couples in retirement. This allows a couple to both have income that is taxed within the $6,000 tax-free threshold, income taxed at 15% and so on.
Let us consider a couple that are retired and aged 58. Let us assume that they have assets that produce income of $40,000. If these assets are held in one person's name then some of that income will be taxed at 30%. However, if the income is split between two people, the top tax rate will be only 15%. Moreover, when the income is held in one persons name only $6,000 of this will be assessed under that one tax-free threshold. When the income is split between two people each of their $6,000 tax-free thresholds are utilised so that $12,000 of this income will be tax-free.
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