A super time to split

Super splitting now could offset the latest proposed super changes.

Summary: For those with higher super balances, splitting contributions with a spouse could avoid having to pay the government’s proposed 15% tax on income above $100,000 in pension phase.

Key take-out: Those with lopsided super balances might want to consider splitting contributions with their spouse immediately for FY12 contributions.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

There has been a relatively small band of superannuation experts who, in recent years, have continued to push heavily a very unfashionable strategy.

The strategy concerned is spouse super splitting. It was a strategy that had some real value when reasonable benefit limits (RBLs) were such a serious handbrake on growing your super.

But then RBLs were abolished, and pension funds and super pensions were both made completely tax free. The strategy seemed to have become completely irrelevant and pointless.

However, those advisers argued that, as a risk-mitigant against potential future government regulatory changes (wouldn’t you know it), it always had a value.

So who’s laughing now? (And any of their larger clients who followed their adviser’s recommendation owes them a special bottle of something.)

The most obvious strategy that has come out of last month’s changes to the super rules is going to be the advantage of having two people to share a superannuation nest egg.

Even though there is no certainty that this government will get its proposed changes to superannuation rules through parliament, it would be silly to risk it.

If you are making contributions this financial year (before 30 June), then make sure you put in due consideration into whose name the contribution is made.

Even up the score

You simply have to. It could be a seriously costly annual tax error to have uneven super balances between a husband and a wife from now on.

While the government’s assertion that the new pension earning tax will only affect those people with more than $2 million in super is codswallop (see my column Busting the super reforms myths on April 10, 2013 for an explanation), let’s use that as a base for simplicity.

To take an extreme, let’s take a SMSF that has $3.5 million in super. Of that, $3.4 million belongs to Member A and $100,000 belongs to Member B. Member A is likely to have pay $10,500 in income tax on his pension.

(The new proposed super pension tax rules state that pension funds earning more than $100,000 a year will have to pay 15% income tax on the amount above $100,000. For a broader explanation of how this works, see the April 10 column.)

But if Member A and Member B both have balances of $1.75 million, then no tax is paid.

Tackling non-concessional contributions (NCCs)

How do you even out contributions? Some of it is relatively easy, while some of it takes a little work.

Clearly, voluntary contributions, such as non-concessional contributions (NCCs) is the easiest choice to make. If you were going to make some sort of NCC this financial year, then you should take into consideration whether you should make that NCC to the person with the lower balance, or perhaps a portion of that contribution.

In the main, this is after-tax cash being deposited into a fund. You get to choose into whose account it goes.

You need to be aware of the $150,000 NCC limits each year, the three-year pull-forward rule and the eligibility rules for making those contributions. See previous columns for more information.

Concessional contributions (CCs)

For many, this is going to be a little tricker. But it’s also where you can rewrite a little history.

(This is assuming that the existing concessional contribution limit of $25,000 applies to everyone for this year. However, older members who had $50,000 CC limits for FY12 might be able to do the same thing with larger contributions if they’re quick and can get the paperwork done before the financial year ends.)

The rules surrounding spouse super splitting are, roughly, that you can split up to the amount of the CC made for the previous financial year (say June 30, 2012), if done before the end of the following financial year (June 30, 2013), less contributions tax.

That is, if the husband (for example) was the only one eligible to receive or make CCs for FY12, then he could, prior to June 30, 2013, do a super split with his wife for $22,500 ($25,000 less 15% contributions tax).

For those who have particularly lopsided super balances right now, this is a strategy you might want to consider immediately for FY12 contributions, while you still have the chance.

And, as alluded to above, if you had a $50,000 CC limit for FY12, then you could potentially split with your partner now.

Taking it to the limit

For people taking contributions (NCC and CC) to the edge each year, then it’s really important that you sit down with an adviser and start planning your contributions properly.

There are some things you should potentially do immediately, plus other things that you might want to be doing from July 1, particularly those who might be able to take advantage of a CC limit of, say, $35,000 for the next couple of years.

Don’t worry about the family law tax consequences

Understand that I’m not a lawyer. But since the rules were changed earlier this century, superannuation has largely become a divisible asset as far as relationship breakdowns go.

It used to be the case that the (generally) husband could have a $2 million super account that was completely untouchable in the event of a separation. That’s no longer the case. Superannuation is counted as “just another asset” when it comes to splitting up the financial pie that comes at the unpleasant end of a relationship.

So, if you’re the person who has the bigger balance (say $2 million versus $100,000), don’t be under the false impression that splitting future super contributions will work against you. It won’t. Your super is your partner’s super, in the eyes of the law, anyway.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au
Graph for A super time to split

  • Superannuation funds recorded a negative month of performance in March after nine consecutive months of growth, according to super fund rating company SuperRatings. The rating company found that the median balanced fund fell by 0.2% in March, although growth for the year to date still stands at a healthy 12.5% and super funds still recorded positive returns for the quarter. SuperRatings also said super funds are still on track to deliver the strongest financial year performance since before the global financial crisis.
  • Federal treasury has announced plans to form a Superannuation Regulators Working Group with the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investment Commission (ASIC) and the Australian Taxation Office (ATO) to implement a response to the parliamentary inquiry into the collapse of Trio Capital and Richard St John’s report into compensation arrangements for consumers. The SMSF Professionals’ Association of Australia (SPAA) says it broadly supports the federal government’s response, but notes there are some aspects of the reports’ recommendations that should go further than their original proposals, such as a last resort compensation scheme.
  • BGL Corporate Solutions, a provider of administration software for self-managed super funds (SMSFs), has announced a partnership with analytics group RP Data, to provide automated property data to SMSFs. “Clients will be able to request residential and commercial property valuations in a number of different forms through the software,” BGL managing director Ron Lesh said. Land Title searches and depreciation data are expected to be rolled out on the service later this year.

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