Splitting your super contributions

Contribution splitting has been around since 2006 and we suspect it’s an underutilised strategy. As the name suggests, the rules allow you to split your superannuation contributions with your spouse, effectively shifting some of your super to them.

We’ll explain why you might do this, and how, but first let’s run through the rules.

Contribution splitting explained

It’s important to note that the rules of your fund (in the case of SMSFs, the trust deed) need to allow splitting. If they do, you can split up to 85% of your concessional contributions (up to the annual cap) with your spouse (including compulsory, salary sacrificed and other voluntary contributions), even if they’re also making contributions.

You’ll qualify for splitting if you’re married, in a defacto relationship (including same-sex couples) or your relationship is registered under a state or territory law. Your spouse must also be under their preservation age or, if they are above it, be under the age of 65 and not ‘retired’ (for superannuation purposes).

Contribution splitting happens after the fact. You make contributions to your super fund during the year and you have until 30 June of the following year to transfer them to your spouse. But you can only split once each year.

That’s what contribution splitting is. Why might it be a good idea?

The case for contribution splitting

There’s some specific advantages you get from splitting (more below) but one of the main benefits is a more general one: ‘future proofing’ your super.

One of the mooted changes to super is a ‘pension tax’ aimed at larger super balances, or higher levels of income. The previous Labor Government proposed such a change – taxing income above $100,000 a year – and, while it didn’t proceed, similar changes will always be on the radar.

A way for couples to minimise their overall exposure to such a tax (or any other change targeting large balances) is to spread their super as evenly as possible. Circumstances (for instance, one spouse not working, or earning a lower income) don’t always provide for equal super balances, so super contribution splitting is a way of evening things up.

Unfortunately, the amount that can be split is subject to an annual limit; you can’t just transfer a big chunk of your super balance if you’re affected by a future change in law. So you need to ‘future proof’ your super now by splitting your annual contributions in favour of the spouse with the lower balance. Fortunately, it’s a simple, costless, exercise to undertake (more below).

Specific benefits

Contribution splitting isn’t just about future proofing; in the right circumstances there can be specific benefits:

1. Accessing the lump sum low rate (tax-free) threshold. If you’ve reached your preservation age, but you’re under the age of 60, you’re taxed on (the taxable component of) lump sum withdrawals. But everyone is entitled to a ‘low rate threshold’ ($185,000 for the 2014/15 year) that allows them to withdraw a lump sum (up to the threshold) tax-free. If one member of a couple has a balance lower than this, the tax-free threshold goes to waste. Contribution splitting is a way of increasing the balance of the smaller account, allowing a couple to use more overall tax-free threshold.

2. Paying insurance premiums for non-contributing spouse. You can use super splitting to pay your spouse’s life, income protection and TPD insurance premiums through super. Liam often uses this strategy where one spouse is working to establish a new business and there’s a lack of cash flow to pay premiums.

3. Increasing age pension entitlement of older spouse. If there’s a large age difference between couples, it can make sense to shift super to the younger spouse. The age pension ‘asset test’ excludes your spouse’s super while it’s in accumulation mode. In this case, splitting super in favour of your spouse can allow you to access the age pension (or a higher age pension) and the Commonwealth Seniors Healthcare Card until they starting taking a super pension. This is often an essential strategy for those with medical issues, on the cusp of qualifying for the age pension. But if you’re thinking about splitting contributions for this reason you need to consider the negatives as well (more below).

4. Accessing tax-free income sooner.

We often say the right strategy depends on your circumstances and super splitting is a great example. In some cases it makes sense to split in favour of the younger spouse but in others it might be better to shift super to the older person.

If you’re a lot older than your partner and approaching age 60 (when you can withdraw super tax free), you might benefit if they split contributions in your favour, especially if you’ve still got a mortgage (and even more so if the interest isn’t tax deductible). Shifting super to the older partner gives you greater access to cash (both lump sums and ongoing pension payments).

If you’re considering splitting contributions it’s a matter of weighing up the pluses and minuses of each strategy. If you won’t qualify for the age pension and the younger partner has the larger balance it can make sense to split in favour of the older person. But if the older spouse will get the age pension and the younger person has a small balance, the benefit of accessing greater cash flow may be offset by loss of age pension, more overall tax across the balances and the risk of a future pension tax hitting the larger balance.

If you're having trouble working out the financial impact of each approach, we suggest speaking with a Centrelink Financial Information Services officer (phone 132 300) and, if necessary, seeking personal advice. Even if you don’t regularly use a financial adviser, the period leading up to you or your spouse starting a pension can be a very good time to seek one-off advice on your options.

What’s involved?

If you’ve decided to split contributions, the steps involved are fairly simple. But an important point to remember, if you’re making a contribution you’re planning on deducting in your tax return, is that you must first submit a ‘Notice of Intent to Claim a Deduction for Super Contributions’.

Once you’ve done that, or if it’s unnecessary, the steps involved for an SMSF are:

1. Inform your trustee. Send the Contribution Splitting Form to your SMSF trustee(s). This sets out the required information including the amount you wish to split to your spouse’s account and the relevant financial year.

2. Minuting the request. We recommend the trustees pass a written resolution or hold a meeting (documented with a minute) approving the request. Here’s some example wording for an approval: 'The trustees having received a valid request for a superannuation split from [member’s name] to [member’s name] and confirming this is allowed by the Trust deed accept the request and will advise the administrator to implement the split.’

3. Tell your administrator/accountant. Once approved, let your administrator or accountant know that the financials need to reflect the split.

If you’re a member of a retail or industry super fund they’ll probably have their own process and forms for documenting a contribution split (see, for example, Australian Super’s).

Contribution splits are done after the relevant financial year has ended, although there’s an exception if you’re rolling over, or cashing out, your entire balance (in which case you can do the split at that time).

In the right circumstances super contribution splitting can be a useful strategy, just be sure to account for all the pros and cons of the course of action you intend to take. Please feel free to contact us via our Q&A function if you have any questions.

Richard Livingston and Liam Shorte are founders of Eviser.