Effects of the $500,000 cap on your super.
SUPER splitting was introduced to increase the superannuation of non-working spouses. It was also used as a way of ensuring a working spouse did not exceed the superannuation reasonable benefit limits that existed at the time. If over 50s want to maximise their super contributions, super splitting could be a way of keeping below the new $500,000 threshold.
Q I have read that you cannot contribution-split to a spouse aged over 55 if they are retired. If the spouse was always a stay-at-home mum or dad, are they technically retired if they are over 55?
A When you search the database of the Tax Office, there is no definition of retirement. In this situation, the law uses standard definitions. Websters Dictionary defines retirement as a withdrawal from ones position or occupation or from an active working life .
If a spouse has always stayed at home and run the household, this does not change once they turn 55. For a person to be considered as retired (who has always been involved in domestic duties), their activities would need to change for them to be classed as retired. If, once turning 55, they stopped doing the housework and spent their time lying by the pool, they could then be considered as retired.
Another reason why turning 55 would not result in a non-working spouse being classed as retired is that retirement or preservation age differs depending on a persons date of birth. For those born before July 1, 1960, preservation age is 55. This increases in yearly increments until it is 60 for people born after June 30, 1964.
Q I am over 50 and have two super accounts with a combined value of almost $500,000. The ATO website talks about a limit of $500 000. One is an accumulation fund worth $45,000 and the other is a defined benefit fund worth $445,000. I currently salary sacrifice about $12,000 to the accumulation account and am worried will I have to stop all of my salary sacrificing now that I am near the $500,000 value limit?
AThe $500,000 limit you are referring to is an election promise made by the Gillard government. If this promise becomes legislation, people with less than $500,000 in superannuation that are 50 or over will have a maximum super contribution limit of $25,000 more than the standard limit.
The standard contribution limit for people aged up to 49 is currently $25,000, and $50,000 for people age 50 and older. The upper limit is set to cease from July 1, 2012. If the legislation is passed, you will still be able to salary sacrifice but only up to the $25,000 limit. How much can be sacrificed will be affected by the super contribution made by your employer to your accumulation account and the deemed contribution made to your defined benefit account.
To work out how much you can actually salary sacrifice each year, you will need to contact the defined benefit fund and ask what the deemed contribution amount will be. Unfortunately, this may not be an easy task as these funds are often reluctant to provide exact estimates during a financial year.
Unfortunately, this leaves you in the position of choosing to salary sacrifice an amount that is actually less than you possibly could have contributed. This is because if you underestimate the deemed employer contribution amount and, when you combine the final deemed contribution with the other employer super contributions, this could result an excess contribution that will be taxed at 46.5 per cent.
Questions can be emailed to super@taxbiz.com.au
Frequently Asked Questions about this Article…
What is super splitting and how can it help me stay below the $500,000 superannuation threshold?
Super splitting lets a working spouse transfer part of their concessional contributions to a spouse's super account. It was introduced to boost non-working spouses' super and can also be used strategically by people over 50 to shift balances and help keep a household’s total super beneath the proposed $500,000 threshold so you can maximise concessionally taxed contributions.
Can I contribution-split to a spouse over 55 who has always been a stay‑at‑home parent?
There is no single ATO definition of 'retired' in the database; the law uses standard definitions (for example, Webster’s: withdrawal from an active working life). If your spouse has always performed domestic duties, turning 55 alone does not automatically make them 'retired' for splitting purposes — their activities would need to change substantially for them to be classed as retired.
Does preservation age affect whether a spouse is considered retired for super splitting?
Yes — preservation age (the age at which people can access preserved super) varies by date of birth, so simply turning 55 may not equal retirement for everyone. For example, people born before 1 July 1960 have a preservation age of 55 and it increases in yearly steps to age 60 for those born after 30 June 1964.
I'm over 50 and my combined super is close to $500,000 — do I have to stop salary sacrificing now?
The $500,000 cap referenced in the article was an election promise and would only affect contribution rules if it becomes law. Currently the concessional contribution limits cited are $25,000 for people under 50 and $50,000 for people 50 and over (with the upper limit scheduled to cease from 1 July 2012). If new legislation is passed, salary sacrifice arrangements will be affected and you may be limited to the standard $25,000 concessional cap, so you should monitor legislative developments and plan conservatively.
How do defined benefit funds affect how much I can salary sacrifice to my accumulation account?
Defined benefit funds produce a 'deemed contribution' amount that counts towards your concessional contribution cap alongside employer contributions into your accumulation account. To know how much you can safely salary sacrifice, you need the defined benefit fund’s deemed contribution figure for the year.
What if I underestimate the deemed contribution from my defined benefit fund and exceed the contribution cap?
If you underestimate the deemed or employer contributions and your combined contributions exceed the cap, the excess contributions can be taxed heavily — the article notes an excess contribution tax rate of 46.5% — so underestimating creates a real tax risk.
How can I work out exactly how much I can salary sacrifice each year with both accumulation and defined benefit accounts?
Contact your defined benefit fund and ask for the deemed contribution amount for the financial year, then combine that with your employer super contributions to calculate headroom under the concessional cap. Because some defined benefit funds may be reluctant to give precise estimates mid‑year, many people choose a conservative salary‑sacrifice amount to avoid accidentally exceeding the cap.
Who can I contact with further questions about super splitting, contribution caps or the $500,000 proposal?
The article suggests emailing questions to super@taxbiz.com.au for further commentary or clarification about super splitting, contribution limits and the proposed $500,000 cap.
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