Spouse splitting makes super sense

PORTFOLIO POINT: Consider starting spouse super splitting arrangements now if you want to take advantage of higher concessional contribution limits later.

Sharing and caring – and minimising your tax burden – in your old age, that’s what super is all about.

And if Eureka Report can make it more profitable for you lovebirds, then fabulous. So today, we want to rekindle the super love with a super splitting strategy that you just might want to consider starting sooner rather than later.

Splitting your superannuation with your spouse has waxed and waned as a superannuation strategy. Sometimes it seems great. At other times, it seems pointless.

But there is one door that’s open that might allow you, as a couple, to make larger tax-friendly concessional contributions into super in a few years.

In this year’s federal budget, the government pushed back the introduction of the “50-50-500 rule” to July 1, 2014. (See this article Please explain, Mr Rudd for what the rule is about).

In essence, the 50-50-500 rule is designed to allow those over 50 years of age, with less than $500,000 in super, the ability to continue to contribute $50,000 each year as concessional contributions.

As the contributions tax rate is 15% and marginal tax rates are up to 46.5%, this could potentially be a powerful strategy, depending on the fine print to these rules, which hasn’t been released yet.

Spouse splitting – how it works

Under the spouse super splitting arrangements, one partner can split their contributions to their partner up to 85% of the concessional contributions made for the previous year.

That is, if you made SG and salary sacrifice contributions of $25,000 in FY12, you could split up to $21,250 with your spouse.

So ... should I avoid getting to $500k in super?

In some cases, that might make sense, yes. And super splitting might be the answer. Let me give you an example.

For a second, let’s assume the 50-50-500 rule is implemented on its new delayed schedule of mid 2014.

Let’s take a husband and wife in their 50s. The wife has worked over the years, but spent many years off paid work raising the kids. As a result, the wife’s super balance is just $80,000, while the husband’s is $300,000.

If the husband continues to make concessional contributions (superannuation guarantee, plus salary sacrifice or other concessional contributions) of up to $25,000, it’s likely that in just four years, with 6% income and growth of the super asset values included, that the husband could be knocking on the door of $500,000 and might have only one or two years (beyond July 1, 2014) of being able to put in $50,000 in concessional contributions under the 50-50-500 rule.

If the husband split his super each year with his spouse, he might be able to forestall getting to $500,000 for a few more years. The money is still getting into super (though to his wife) and you’re still able to contribute up to $50,000.

Using the above example, the husband could potentially delay getting to $500,000 in super by at least two years by spouse super splitting.

Those breadwinners with smaller super balances could potentially make it last even longer.

But do I lose my super if we separate?

Possibly. But there’s a good chance that you would have anyway.

Superannuation has been a splittable asset in regards to divorce for the better part of a decade now. It gets lumped in with the house, the shares, the investment properties ... and the kids.

Super is just another asset to be considered as part of the wealth pile accumulated by the couple. When it comes to financial settlements, you are likely to have to hand over some anyway.

What are the risks?

Plenty. (And anyone considering the potential benefits of this as a strategy should consult a knowledgeable financial adviser.)

For a start, the government still hasn’t set out the full rules for what is included in the 50-50-500 rule. It could rule that anything that has been contributed to an individual’s super fund counts towards the $500,000 limit. If you have a balance of $450,000, but you have super split four lots of $21,250, then they deem you to have $535,000 in the super fund.

But we don’t know. The rules haven’t been laid out yet.

In that case, much of the gloss might be taken off. However, given government statements on what is a “reasonable” amount to have in super, this would seem less likely, as allowing a couple to have two lots of $500,000 would not seem unreasonable.

Another issue is when your partner can access their super. If they’re significantly younger than you, then the money will be locked up in super’s access rules until they reach preservation age (see my column Raising the preservation bar). This might be of benefit, but may also be a hindrance.

If they’re significantly older than you, then it could become an asset counted for the age pension income and assets tests and could impact on your ability to claim the government age pension.

But there’s a good chance that, in the right circumstances, the risks will be worth it. It will, however, differ for every couple.

At worst, you might have a more even super split, though not be able to contribute more to super. At best, you might get a few extra years of tax savings and being able to access higher concessional contributions limits for the person earning a higher income stream.

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.

• The Australian Securities and Investments Commission has launched a taskforce into self-managed super funds. Commissioner Peter Kell told a Parliamentary oversight committee for ASIC that the taskforce had been set up because: “We do have some concerns about some of the advice that is being provided in this space and whether people have sufficient understanding of the responsibilities and sufficient resources to get into that particular vehicle in all cases.” ASIC chairman Greg Medcraft had previously highlighted in June that self-managed super was a key concern for the regulator because it is “unregulated, effectively”. Comissioner Greg Tanzer also told the committee that progress on the SMSF auditor register was on track for the 2013 anticipated launch dates, with registration to open from the end of January.
• The SMSF Professionals Association of Australia has come out in support of the current regulatory framework for self-managed funds. In a statement, SPAA CEO Andrea Slattery said self-managed funds should remain regulated by the Australian Taxation Office (ATO), and not the Australian Prudential Regulation Authority (APRA), because the latter lacks the resources and expertise to oversee them properly. “All the evidence suggests that the ATO does an excellent job regulating this sector,” she said, and called suggestions for APRA control “both mischievous and illogical”. Slattery added: “There are never any facts or figures to demonstrate the ATO is falling down on the job. Just the claim that SMSFs are ‘lightly regulated’ and that APRA would be a more appropriate regulator.”
• In further consolidation of the self-managed super industry, administrative group SuperIQ has acquired the SmartSuper, according to business reports. Formerly a Perpetual business until sold around this time last year, SmartSuper is “migrating content and internet facilities to the SuperIQ system” according to a statement on its website, which redirects to the SuperIQ home page. The move is the latest in a push for scale in the fast-growing and potentially lucrative SMSF administration space, after retail super giant AMP moved to set up its own SMSF business acquiring Cavendish Superannuation earlier this year. AMP owns a large stake in SuperIQ.