Team super

Couples can build their superannuation more effectively working together than individually. Here’s how.

PORTFOLIO POINT: Share the SMSF love. Taking a joint perspective to contributions strategies can be far more effective.

Building your superannuation nest-egg can be a lonely challenge, not unlike trying to climb Mt Everest. Sure, you can surround yourself with committed, like-minded people. But you’d better believe they will order you back down with a Sherpa if you’re going to hold them back from reaching their summit.

Okay, not quite. There can be some great help along the way. But Eureka Report readers know that if they want to achieve something in super, then the best person to left in charge of achieving that goal is you.

When you’re part of a couple, you have someone there to help you – with investment decisions, and the hiring and firing of “help”, including accountants, auditors and financial advisers.

But there are also ways to help each other financially with contributions. And today, we’re going to look at two of those.

Spouse contribution splitting

Traditionally, the decision to run a salary sacrifice contribution strategy is made on an individual level. These are usually based on facts such as your age, your salary, your tax position and your length of time until retirement.

Often, a couple will look at their salaries and say, “Well, how much can I live on and, therefore, afford to salary sacrifice for the current year?” Taking an individual approach can lead to the wrong overall outcome for the couple. And it can lead to unnecessarily paying too much tax.

If both members of the couple are high earners and have enough disposable income, then they could well be able to use their age-based concessional contribution limits of $25,000, or $50,000, if they’re over 50 for this financial year, of if they qualify for the government’s promised 50-50-500 rule, which is due to come into force from July 1 (though we’re still awaiting the detail).

Small business owners operating through family trusts, or companies, might be able to make equal contributions, because they’re earning similar amounts, or because earnings can be organised that way.

But what if one member of the couple is earning considerably more? And what if they can’t afford to make concessional contributions of a total of $25,000 each, or $50,000 each. And what if it doesn’t make sense for the lower-earning spouse to make concessional contributions?

Overlay that with a concern from one spouse that they have a significantly smaller super balance than the other? This can cause problems.

Well, one strategy is to use the “spousal contribution splitting” rules.

Super laws allow the splitting of contributions between spouses. It doesn’t mean that you can use two limits (as in, two times $25,000 for one spouse to split between two), but it does allow for some useful super contributions planning.

For example, let’s say that one spouse is earning $150,000 and the other is earning $30,000 a year. They each get 9% superannuation guarantee payments made by their employers (9% of $180,000 equals $16,200). Between them, they have certain expenses to be met, but they could afford to do without another $8000 of their salaries each year.

They could salary sacrifice $4000 each from their salaries, but that wouldn’t create the most effective tax position. If the lower-earning spouse salary sacrificed $4000, his/her effective tax break would be minimal, if anything. As his/her marginal tax rate would be no more than 16.5%, the maximum tax break, compared to the 15% being paid on concessional contributions, would be a maximum of $60.

The higher-earning spouse, however, would get a tax advantage on his $4000 salary sacrifice of $940 (the difference between a marginal tax rate of 38.5% and the super contributions tax rate of 15%). The combined tax savings would be $1000.

However, if the couple took a “holistic” view of their finances, they could get the higher-earning spouse to potentially salary sacrifice the entire $8000. That would lead to a tax saving of $1880 ($8000 times 23.5%, which is the difference between a marginal tax rate of 38.5% and the super contributions tax rate of 15%).

Given after-tax requirements, it’s possible that the higher earning spouse could salary sacrifice $9000 to save $2115 in overall tax, while still staying under his $25,000 concessional contributions limit. At $9000 salary sacrifice, his total concessional contributions would be $22,500. If they could go a further $2500, the savings would increase more.

But the household budget would need to be considered.

And depending on income requirements, if the higher earning spouse were over 50 and could take advantage of the $50,000 concessional contributions limit, then the possibilities increase beyond being able to have concessional contributions of $25,000.

Then enter spouse contribution splitting.

If the aim was to increase both spouse’s super by an extra $4000 (or equal amounts, after contributions tax), then it can still be achieved, via “spouse contribution splitting”.

In essence, the rules state that concessional contributions for one financial year can be split with a spouse, before the end of the following financial year. That is, if the concessional contributions were made in the year to June 30, 2012, then you would have until June 30, 2013, to split those contributions with your spouse.

If we follow the original example’s intention of having equal contributions for the year, up to $3400 ($4000 less 15% contributions tax) could be split from the higher-earning spouse’s super account to the lower-earning spouse’s super account. (Although, more could be split with the lower-earning spouse.)

When it comes to managed-fund accounts, it depends on whether each spouse’s super fund will allow spousal contribution splitting. With SMSFs, you’ll need to check your trust deed.

But the advantages can vary enormously, and be substantially bigger than above depending on the relative earnings of each spouse and whether they can take advantage of $25,000 or $50,000 concessional contributions limits.

The contributions sent from one spouse’s account to the other will be received as concessional contributions. It does not allow you to go over your personal limit before the split. (What I have discussed here does not take into account using the spousal splitting strategy to maximise age pensions, but that’s a strategy for another day.)

Spouse contribution tax offset

The spouse contribution offset requires less strategy, I’m glad to say. A taxpayer can receive a tax rebate of up to 18% of a contribution of up to $3000 for making a contribution to their spouse, who earns less than $13,800.

If the low-earning spouse earns less than $10,800, a full rebate of $540 ($3000 times 18%) can be achieved. Between $10,800 and $13,800, the maximum rebate falls by each dollar earned by the lower-earning spouse. Therefore, if the lower-earning spouse earned $12,800 for the year, a rebate of a maximum of $180 could be achieved, if $1000 or more was contributed.

The person making the contribution can’t have claimed a tax deduction for the contribution, both must be Australian residents, you must not have been permanently separated and it needs to have been made to a complying fund.

The contribution is received into the super fund as non-concessional.

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 advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.

  • The number of women SMSF trustees who are engaged with their super is rising, but this isn’t the time to lose focus on the gender gap in retirement savings, says the Superannuation Professionals Association of Australia (SPAA). Chief executive Andrea Slattery suggests voluntary and compulsory superannuation “catch-ups” for women when they take maternity leave and putting contribution caps back at pre-2009 levels would end limitations on women returning to the workforce from making up for lost super. The self-driven nature of an SMSF means that women trustees are more hands-on than their peers in large funds and Slattery says she is seeing growing interest from women in this area.
  • SMSFs are still loading up on cash, according to a survey of DIY fund assets in the December quarter. SMSF administrator Multiport says term deposits and straight cash holdings grew by 2% yet fixed interest investments fell 2.6%. Multiport CEO John McIlroy says in the report that it looks like term deposits were not being rolled over due to uncertainty about interest rates. Australian equities fell again, by 0.6% to make up 35.4% of SMSF portfolios and the data showed that 80% of members preferred to invest in local stocks via a managed fund rather than make a direct investment. Property allocations rose 0.8% in the three months to December 31.
  • Accountants should know what will happen to the SMSF exemption and further details about auditor registration within the next two weeks, the Institute of Chartered Accountants (ICA) says. The group’s January superannuation bulletin says it expects a “reasonable transition period” before the exemption is removed (it allows accountants to work with SMSFs without obtaining a financial services license). Auditors are likely to have to register with ASIC. The ICA says that the details will have big implications for how charted accountants work in the future.

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