When a marriage split works

A COLLEAGUE has just told me that my splitting my employer's super contributions with my spouse would help me avoid the penalty tax on super contributions in excess of $25,000 annually. Is this correct? If so, how do I go about it?

Unfortunately, this isn't an option even though every taxpayer aged under 50 is eligible to receive up to $25,000 of employer super without being subject to penalty tax. Above the age of 50, the allowable limit each is $50,000 annually. To take advantage of these annual limits, both of you would need to be employed or be eligible to make the tax-deductible super contributions.

This doesn't help me. My spouse only earns a small wage and receives only a small amount of employer super. Why do you think my colleague was telling me about the benefits of moving super to my spouse?

I really don't know. There could be several reasons. Spouse contribution splitting was introduced to assist couples to share their super more equally between them. Before, the only opportunity to transfer super tax-free to a spouse account was in a divorce situation. The family law provisions allow the transfer of super balances between spouses in marriage breakdowns. Now eligible taxpayers can transfer up to 85 per cent of each year's employer and other tax-deductible super contributions to a spouse account. The transfer must take place after the end of each financial year after the 15 per cent contributions tax has been paid.

You still haven't explained why my colleague thinks there's a benefit in doing this.

I was coming to that. First, however, you need to know that not all super funds allow members to split spouse contributions. The best ones do because it can provide a big benefit in some cases. Apart from helping balance the size of each account within the family, spouse contribution splitting can assist when one spouse is older than the other because the older spouse can access his/her super either as a pension or lump sum sooner than the younger spouse. The more money that can be moved to the older spouse's account, the more flexibility the couple will have in accessing their super.

I can see the advantages in that situation. But how could spouse super splitting help avoid the penalty tax on excessive contributions, which is currently attracting much publicity?

There's one possible way spouse contribution splitting could help in the future. From July 1 next year, the government intends to change the rules allowing access to the higher $50,000 annual contribution limit available to people aged 50 or over. After that time, the higher limit will be available only to taxpayers with less than $500,000 in their super account. People with more super than this will have access only to the lower $25,000 annual limit available to those under 50. This lower limit will make it more difficult for older people to make large contributions to super after July 1 next year. But moving money every year into a separate spouse account could help some taxpayers by keeping their super balance below $500,000 for a longer period of time.

What are you suggesting? Is your advice to use spouse contribution splitting so as to help increase the amount of money that can be paid as superannuation later in life?

As always, it depends on each couple's personal situation and likely involvement in the workforce. When one spouse has a low income and is unlikely to earn a high income later in life, contribution splitting to that member's account will help the higher-earning spouse to keep his/her account balance below $500,000 for a longer period of time.

I see your point. What about when both spouses have a similar level of income?

In that situation, the appropriate strategy to consider is spouse contribution splitting in favour of the older spouse or the one most likely to reduce his or her future workforce involvement. This may allow the spouse intending to work for a longer period to gain access to the higher $50,000 contribution limit for some time after age 50.

The reality of our situation is that with our mortgage and school fees commitment, it could be some time before either of us could afford to divert more than $25,000 a year to super. In my case this would require a salary sacrifice contribution of about $10,000 a year on top of my compulsory superannuation. So is spouse contribution splitting worth the additional effort involved for us?

It's entirely your decision. The advantage of moving as much super as possible into your spouse's account under the splitting arrangements is that later in life your financial situation could change. Your school fee outlay will come to an end and similarly your mortgage commitments may be reduced. Having access to the $50,000 annual cap increases the options available to you. For example, it could help reduce the tax rate payable on a sizeable bonus later in life.

I've one final question. Wouldn't it be fairer if the government legislated for a combined family super contributions cap? This would allow me to take advantage of the unused contributions cap available to my spouse and allow us to plan as a couple.

You're right insofar as the contributions cap rules favour couples where both spouses are working and have similar annual incomes. A future government may revisit this issue as well as the rationale for reducing the cap for people who are seeking to boost their retirement assets later in life. But this may never happen, so taking advantage of the spouse contribution-splitting rules now could help improve the long-run superannuation savings options available to you.

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*Daryl Dixon is the executive chairman of Dixon Advisory.