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Self Managed Super Fund (SMSF) Article
Splitting Contributions Between Spouses
By Tony Negline.
This article may be out of date.
2nd November 2005
Allowing spouses to split super contributions with each other was first proposed by the Liberal Party's during the 2001 Federal election campaign.
Initially it was meant to be available from July 2003 onwards.
It will become available for contributions made after December 2005. The government is only partly to blame for the delay. Between the 2001 and 2004 elections the ALP and Democrats refused to pass the necessary legislative amendments unless specific policy design issues were dealt with to their collective satisfaction. The government didn't agree with it political opponents and because it lacked guaranteed control of the Senate it was powerless to progress this policy further. Effective Senate control now allows this policy to be implemented as the government first broadly outlined four years ago.
The fine operational details of contribution splitting are still being finalised but we know enough to see what benefits should be available from this policy. In simple terms the policy is excellent. It doesn't go far enough but it lays the groundwork for couples to split their benefits and not just contributions.
Under the policy super members will be able to split their personal or employer contributions made during a financial year with their spouse once that financial year has finished. Let's look at an example as to how this might benefit retirees.
Each year Bill Smith salary sacrifices $20,000 into his superannuation. His employer also makes Super Guarantee contributions of $7,000 for him.
Bill is about 10 years away from retirement and has $500,000 of super assets. If we assume that his lump sum RBL is indexed each year by 4.5% then it will be worth about $1 million in 10 years time. Over the same period Bill's super will be worth about $1.5 million (assuming an average fund earning rate of 8% net of fees and taxes). Clearly an excess benefit issue which will have to be carefully managed.
His wife, Mary, has no super. What would happen if Bill asked his super fund to give all his super contributions – including his employer's compulsory contributions – to Mary? Three very important impacts occur.
Firstly, Bill will not be adding new money to his $500,000 of current benefits. Assuming the same earnings rate above he would have about $1.079 million in super which is close to his lump sum RBL. One problem almost solved.
Secondly his wife will now have some superannuation and again assuming a net rate of return of 8% over 10 years she will have about $350,000 in super. Clearly splitting contributions has allowed Bill and Mary to both generate retirement income thereby accessing both their Reasonable Benefit Limits.
Thirdly when they retire they will be able to access both their income tax-free thresholds rather than just Bill's. Clearly for most couples who haven't retired splitting contributions will create some great planning opportunities.
It will not be compulsory for super funds to offer contribution splitting to its members. Given the strong benefits of this strategy to Bill and Mary it would be a surprise if Bill didn't move to another fund so he could access it. And this brings us to the fourth impact.
This may cause Bill to actively thinks about moving to another super fund so he can access contribution splitting.
When Bill splits his contributions with Mary she would need to join a super fund. Bill's eligible start date doesn't travel with the transferred contributions.
If Bill is over 55 then he may also be able to use the new Transition to Retirement rules to gain an even bigger advantage from splitting contributions. With some or all of his super account balance Bill could start an allocated pension. Until he retires he cannot take any lump sums from this investment. However with each income payment he can receive a 15% rebate. He could also elect to salary sacrifice more of his remuneration and then split all these contributions with Mary.
Thanks to the 15% rebate, this strategy effectively delivers Bill and Mary an income tax cut. Further more money is channeled into Mary's super account which hopefully equalises their respective super balances even more. This strategy will not be for everyone. A lot will depend on how much super each spouse has and how close they are to an excess benefit.
Further anyone wishing to access this strategy or contribution splitting more generally via a Self Managed Super Fund should check their fund's trust deed to make sure that it allows a member to split the contributions made in the previous year.
When a couple divorce it is possible to split superannuation benefits and effectively receive access to both spouse's RBL. However this is not available to non-divorcing couples who are only entitled to the new contribution splitting policy. Many financial planners have noticed the arbitrage provided by a moderately conservative government and carefully point out to clients that if they were to divorce they might save tax on their superannuation benefits. However they also hasten to add that under the family law provisions, sham divorces can be penalised with up to 12 months jail. If benefit splitting were to become available to everyone, it would probably cost a reasonable level of government revenue which might not be affordable given the noisy clamour for personal and business income tax cuts.
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