Tax with Max: Splitting super contributions

Maximising your super, living in an investment property and passing on properties to your children.

Summary: An investor who is trying to maximise their superannuation may be concerned that moving into pension phase would force them to pay out a percentage of their balance. An investor in this situation may also be interested in splitting superannuation contributions.

Key take-out: Investors approaching retirement age can start a transition to retirement pension. The pension received can be made as a non-concessional or tax-deductible self-employed super contribution for an investor’s spouse.

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

Splitting super contributions

I am 59 and trying to maximise my superannuation. I am contributing $35,000 concessional to an industry super fund through salary sacrifice and $180,000 non-concessional to my SMSF. All contributions to the SMSF have been non-concessional and it is in accumulation.

If I change to pension in the SMSF I will have to pay out 4 per cent of $500,000, making a pension of $20,000 that would not help maximise contributions. The bring-forward allowance is not practical with my cash flow. If I change to pension mode, I want to contribute in my wife’s name to our SMSF and then contribution split 85 per cent to me. However only “taxed splittable contributions” can be split to a spouse.

I want to make non-concessional contributions to the SMSF only. However, from the ATO contributions form, “Contributions made by family and friends, other than those made by your spouse or for a child under 18 years old, can be split.” Does this mean that my wife’s mother can contribute to my wife’s super account and then my wife can split 85 per cent with me the following year? Splitting is normally done in the financial year immediately after the financial year in which the contributions were made. 

Answer: The first requirement when considering splitting a super contribution with a spouse is their age. For a spouse to receive split super contributions they must either be less than preservation age, or aged between preservation age and 65 and not be retired. As you have not provided your wife’s age I am not sure whether she will qualify.

There are only two types of contributions that can be split with a spouse. They are taxed splittable contributions and untaxed splittable employer contributions. This last type of contribution only applies to members of a public sector super scheme.

Splittable taxed super contributions include:

  • any contributions made by an employer including compulsory super contributions and salary sacrifice contributions, and
  • any tax-deductible super contributions made under the self employed super contribution rules.

I am not sure why you don’t want any super contributions to be made on behalf of your wife because, if you want to maximise the superannuation benefits that you both have, having non-concessional contributions made on her behalf will help achieve this.

By starting a Transition To Retirement pension you could achieve your aim of maximising your superannuation. It would be best to delay commencing the TTR pension until age 60 as this would mean the pension received will be tax free.

The $20,000 of minimum superannuation pension that you receive could be made either as a non-concessional or tax-deductible self-employed super contribution for your wife. Your would not be able to split any non-concessional contributions, whether you or your wife’s mother makes them, as these are not allowed under the scheme, but she would be able to split the self-employed super contribution with you.

Using a self-employed super contribution for your wife would only be practical if the deduction resulted in a decrease in income tax for her. If her taxable income is not high enough to deliver a tax saving the 15 per cent super contributions tax would be paid without a corresponding reduction in personal income tax.

Another benefit of commencing a TTR pension would be that the income earned on the assets relating to your pension account would have no tax paid by your SMSF. There are number of other strategies that could be used to help maximise your superannuation and you should seek advice from a fee for service professional that specialises in this area.

Living in an investment property

If the owner of a private residential investment property, that had been an investment property since purchase, were to live in it for say a three- to nine-month period, then resume tenanting the property, what would the CGT effect of this be at sale if the property was owned for 15 to 20 years?

Answer: The capital gains tax effect of what you are proposing will be negligible. There are two possible methods that you could use in the scenario you have outlined. Where a property had first been a home, and was rented out after August 20, 1996, only one method can be used.

Under this method you would need to have the property valued at the time it became your home, and then resumed being a rental property. As your property will be a rental property first, and then become your home, you could also possibly use the time method for calculating capital gains tax.

Under the time method the percentage of time the property was your home would be exempt from CGT. If you lived in the property for six months, and owned it for 20 years, 2.5 per cent of the gain would be exempt.

The other method would require you valuing the property at the time it became your home, and then when it reverted back to being a rental property. In this situation you would not pay tax on any increase in the value of the property for the six months you lived in it.

Due to the complicated nature of the CGT legislation you should seek professional advice before taking any action.

Passing on investment properties to children

I have two investment properties that I would like to pass onto my children after my death. Would CGT be applied when my children inherited my investment properties if they keep them as investments, or if they demolished and then rebuilt? What will happen if they cannot afford the heavy CGT payment?

If I leave the two investment properties and my own home into a testamentary trust does CGT apply for each property? What will happen if there is not enough money in the testamentary trust to pay CGT? When the properties change names, would stamp duty be paid?

Answer: When rental properties are inherited, capital gains tax is payable when the property is sold. The gain is calculated by subtracting the deemed purchase cost from the net selling value. The purchase cost depends on when the deceased purchased the property. When the property was purchased pre-September 1985 the purchase cost will be its market value at the date of the death of the deceased.

Where a property is purchased after September 1985 the purchase price of the property will be what the deceased paid for it. If your children decided never to sell those properties no capital gains tax would be payable by them, but it would more than likely be payable when sold by those who inherit the properties.

If your children sold the properties they would pay capital gains tax on the increase in the value over the deemed purchase price. When ownership of the property passes to your children after your death no stamp duty should be payable by them, but you should check with the revenue office in the state where you live.

If your will resulted in the properties being transferred into a testamentary trust capital gains tax would still be payable when they are sold. I do not believe you would get any benefit from using a testamentary trust but you should seek advice from a lawyer to make sure.


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