Tax with Max: Rebalancing your partner's super

For superannuants fearful that a Labor Government would tax super earnings above $75,000, equalising spouses' balances may be an option.

Summary: Non-concessional contributions to a spouse's super require careful planning. And if you are already retired, there are strategies available to rebalance spouse's accounts should a new 15 per cent tax be introduced under a Labor government.

Key take-out: Topping up - or rebalancing - spouses' super could reduce the impact of a new tax slated to be introduced should Labor win the next election.

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

How to add to a spouse's super

Is it acceptable to if you give your 63 year old spouse $500,000 so that she can contribute it to her SMSF account?

Answer: Until a person reaches the age of 65, apart from the contribution limits and the self-employed superannuation regulations, there are no restrictions on them making superannuation contributions. For a person to make self-employed tax-deductible super contributions they must either not be eligible to receive employer sponsored contributions, or their employment income is less than 10 per cent of their total taxable income.

The superannuation contribution limit that most applies to what you are proposing to do is the non-concessional limit. This limit is eight times the general concessional contribution limit. With the current concessional contribution limit being $30,000 the non-concessional contribution limit is $180,000.

Where the non-concessional contribution limit has not been exceeded in the previous three years a person can use the two-year bring forward rule and contribute up to $540,000 in one year. If it is likely that over the next two years you will have sufficient funds for your wife to make further non-concessional contributions you should not give her the $500,000 this year to make the contribution.

If your wife made the $500,000 non-concessional contribution during the 2016 financial year she would only be able to make a further contribution of $40,000 between now and when she turns 65. If you wanted to maximise the non-concessional contributions she can make between now and turning 65 she should contribute $180,000 this year and $180,000 in the following year.

By her making the contributions this way she can contribute up to $540,000 as a non-concessional contribution in the third year, as long as she does this before she turns 65. If the contribution was made after she turned 65 she would need to pass the work test.

Rebalancing super accounts to head off mooted new Labor super tax 

I was particularly interested in your article about Labor’s threat of an imposition of a tax of 15 per cent on the earnings of super funds (Avoiding a future tax on super, May 27). This policy is simply unfair to people who have diligently accumulated funds during their working lifetime in order to retire independently of government assistance.

My situation is that my wife is 71 and I am 73 with both being trustees of our superannuation fund from which we are now drawing a pension to meet living expenses. The total fund balance is approximately $3.5 million. As past contributions to the fund were largely salary sacrificed from my executive remuneration there is a marked bias towards ‘ownership’ of the funds in my name, 95 per cent to 5 per cent.  

There were no doubt opportunities in the past when my wife was employed where I could have split contributions but of course I did not envisage Labor's treachery with the proposed imposition of a tax. I note your suggestion of withdrawing funds from our SMSF for placement in individual investments to take advantage of the $18,200 tax-free threshold. We will pursue this if Labor comes to power.

You also suggest an option to even out members’ balances by making lump sum withdrawals and re-contributing when one member’s account is considerably higher than another. Am I right in assuming that the only way for me to use this strategy is through withdrawal and re-contribution in her name requiring that she meet the work test?

Answer: I agree with you that the Labor party’s policy to impose a 15 per cent tax on income earned in excess of $75,000 by superannuation pension accounts is unfair. It is ironic that when this plan was launched its aim was to make superannuation fairer, when if introduced it will be the first ever retrospective legislation to affect superannuation in Australia, which hardly seems fair.

Your situation is a perfect example of where you as a couple will be unfairly targeted because of the disproportionate amount of superannuation that is held in your name. If the Labor party was serious about making the superannuation system fairer the tax should be abandoned, or at least levied on the basis of a couple’s pension accounts with each having the $75,000 income limit.

The policy is more about what Labor has always done in relation to superannuation, regarded it as a cash cow to help balance the budget, and is more in line with many other of its socialist based-policies trying to make everybody equal. As has been so eloquently put in the past the problem with this philosophy is that there are always people that end up more equal than others.

The first time that this policy was put forward by Labor it had a much higher income level at which the 15 per cent tax was imposed. Thankfully the policy was dropped because once they realised the administrative burden of trying to impose the tax on members with multiple superannuation pension accounts would be too great.

You are right about your wife needing to satisfy the work test to be able to make non-concessional contributions, if you wanted to equalise the superannuation accounts. Unfortunately with her being 71 the maximum that you could equalise the pension accounts would be to withdraw four lots of $180,000 for re-contribution until she turns 75.

You should seek professional superannuation and estate planning advice if your superannuation fund balance is made up of predominantly taxable superannuation. If you do nothing between now and when you both die your non-dependent beneficiaries will be left with a 17 per cent tax bill on any taxable superannuation that they inherit.

Correction

In answering a question recently you wrote, "A tax-deductible $35,000 self-employed super contribution means an investor can make a capital gain of $70,000, of which only half will be taxable, and their tax saving would be considerable. Using an assumed $60,000 income, tax payable on a capital gain of $35,000 including Medicare Levy would be $24,997. By making a $35,000 self-employed super contribution an investor would instead be only paying $5250 in contributions tax, and therefore be achieving a tax saving of $19,747." (Making an extra super contribution, July 22) I can’t work out how you arrived at the tax saving figure, can you explain how you arrived at this tax saving figure?

Answer: I am not sure what happened with my calculation model but the tax saving figure quoted in the article was incorrect as, based on a taxable income of $60,000 before the capital gain is added, the tax payable amount would be $12,750. This achieves a tax saving by making the self-employed super contribution of $7500.

One of the points I was trying to make in the answer to the question is that a major part of retirement tax planning is getting the timing right. Many clients I see have large investments such as property outside of superannuation that they have owned for many years. Where residential property is retained the net income earned is usually only 3 per cent and the capital gains tax problem is passed on to the next generation. By selling investments before a person turns 65 gives them the ability to use the self employed super contribution to reduce tax.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au