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Self Managed Super Fund (SMSF) Article
By Tony Negline.
This article may be out of date.
19th April 2006
From January '06 a very important new superannuation concession was introduced.
The rule is called “contribution splitting” and it allows super fund members to transfer super contributions to their spouse.
This policy potentially allows the equalising of a couple’s super assets over their remaining working lives which could reduce, and possibly eliminate, Reasonable Benefit Limit problems.
Contribution splitting is not compulsory for super funds. But it is hard to imagine why any super funds wouldn’t implement it as soon as possible especially given the benefits that flow from the policy.
How does contribution splitting work? The first point to note is that only heterosexual spouses can split contributions between each other. Whilst a couple might satisfy this spousal rule there are further rules which also have to be met.
Contributions cannot be split if the receiving spouse is:
- 65 years or older
- the receiving spouse is aged over preservation age (55 for those born before July 1960) and under age 65 and has retired.
But what does retired mean? There are two potential definitions:
- the receiving spouse ceased work before age 60 and never again intends to be gainfully employed for more than 10 hours each week
- the receiving spouse is at least 60 but under 65 and terminated a gainful employment relationship after turning 60.
A fund could split contributions if a receiving spouse can declare that they are aged between their preservation age and 65 and are not retired as per the above definitions.
Can a spouse who has never worked – or, at best, has not worked for many years – claim they aren’t retired? In many cases this will turn on complex factual issues. Good documentation, including keeping appropriate file notes will be essential.
When can contributions actually be split? Only after a financial year has ceased. For example, Contributions made between 1st January 2006 and 30 June 2006 can only be split in 2006/07 financial year. Contributions made during the 2006/07 year can only be split during the 2007/08 year. Once the 2007/08 year has finished the 2006/07 year contributions cannot be split.
There is one exception to this rule. Contribution splitting is allowed during a financial year where a member is rolling over or transferring their account balance to another fund.
Super funds can only accept one contribution splitting application per annum for each member. That application must be in writing and must have all the right information otherwise it must be rejected. Presumably a member can reapply in the correct way.
The maximum that can be split is 85% of taxable contributions (ie member tax deductible contributions and all employer) and 100% of undeducted contributions (which will include Government Co-contributions because these are deemed to become an undeducted contributions).
The amount of taxable contributions that can be split is limited to the Post June ’83 Taxed Element of an Eligible Termination Payment that would be payable if the member were to take all their benefits out of the relevant fund when the trustee is making the contribution split.
This provision is trying to cater for the situation where a member’s total benefit has fallen below the amount contributed (due perhaps to fund expenses or poor investment performance). For example suppose Fred’s employer contributed $5,000 to a fund for him. Under the contribution splitting rules he can split up to $4,250 but when the trustee goes to split the contributions, Fred’s account balance is only $4,000 because of a 5% entry fee and no investment return. Fred will therefore only be allowed to split $4,000.
But if we assume that Fred’s 40% of his total service period occurred before July ’83 then his $4,000 account balance is made up of $1,600 pre July ’83 service and $3,400 post June ’83 service. He will only be allowed to split the $3,400.
In a similar vein the amount of undeducted contributions that can be split is limited to the amount of undeducted contributions that would be payable if the member were to take all their benefits out of the relevant fund when the trustee is making the contribution split. This rule is designed to provide for situations where super fund members transfer to another fund some or all of their undeducted contributions made during a financial year.
No part of any rollover or benefit transfer can be split.
If a member wants to split personal tax deductible contributions then the member must notify, in writing, the trustee of their intention to claim those contributions as a tax deduction before applying (again in writing) to split those contributions.
A trustee who does not reject a contribution splitting application must act on it within 90 days of receiving it.
Once contributions have been split they can be rolled over or transferred to another fund or the trustee performing the split can create a member’s interest for the receiving spouse.
As already noted this new policy is very powerful and many super investors once they learn about how it works and what benefits it can offer their family will want to make use of it.
In the executive community a sizeable proportion of employees who have benefits above their pension RBL had stopped making super contributions because the contributions are taxed at 15% on the way into the fund and then (probably) at 48.5% on the way out.Investing outside of super sometimes made more sense. But if their spouse has little super – which is often the case – contributions can be made again and split with their spouse.
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