Spouse Super Balances: Mind The Gap!

Couples in an SMSF often have uneven account balances. There are a variety of reasons why this may be the case, including:

• The age difference of the couple
• Their work history and salary levels
• One-off contributions that may have been made to super from a significant event such as the sale of an asset or an inheritance.

With the increasing wealth in Australia’s Superannuation system, and the Government’s love of constantly changing the goalposts in this area, the issue of spouse equalisation inside an SMSF is more important than ever.

This article specifically looks at the issue of super contributions splitting between spouses and the benefits that can be generated from this measure.

What is Super Contributions Splitting

Super contributions splitting allows individuals to split/transfer contributions to their spouse.

The amount that can be split on an annual basis is 85% of the concessional (taxable) contributions of an individual during a financial year, up to the maximum concessional contributions cap which is currently $25,000 per year, per person.

Concessional contributions include superannuation guarantee (i.e. employer compulsory), salary sacrifice and personal deductible contributions.

The Benefits of Super Contribution Splitting

The major benefits that may arise from contribution splitting are as follows:

1. To ensure one spouse doesn’t get left behind

This is illustrated by the following basic example:

• Bill is 38. He has a super balance of $150,000, and receives $15,000 per year in employer compulsory super contributions.
• Chloe is 36. She has a super balance of $70,000, and has recently become a stay at home Mum. The intention is to have more children and for Chloe to work part time going forward, receiving around $3,000 per year in employer compulsory super contributions.
• Bill chooses to split $10,000 per year of his super contributions to Chloe.
• Over a 10-year period Chloe will receive a total of $100,000 of contributions to her member account from the splitting and Bill will receive $27,500 (after contributions tax) to his member account.
• This will greatly assist in ensuring the gap in the member account balances of Bill and Chloe does not continue to widen in the future, due to their family circumstances.

2. To provide access to retirement savings earlier

Following on from the example above, let’s fast forward and assume that Chloe fully retires at 60, whereas Bill continues working and plans to retire at 65 at the earliest.

With Chloe now retired, Bill and Chloe wish to draw a lump sum from super of $250,000, as they want to renovate their home so that Chloe’s parents can live with them in the later stages of their lives.

As Chloe has reached age 60 and met the retirement condition, she has unrestricted access to her super. Bill, on the other hand, is 62 and hasn’t met the retirement condition and therefore can only draw up to 10% of his super balance (by commencing a Transition to Retirement Income Stream).

The benefit of contribution splitting has meant that Chloe has a sufficient super balance to enable the large withdrawal that Bill and Chloe desire. If they had not commenced contribution splitting and the trend of contributions continued, they would potentially have had to wait until Bill retired or turned 65 so that a sufficient lump sum could be withdrawn from super to meet their $250,000 requirement.

3. Centrelink Implications

Where only one member of a couple has reached the qualifying pension age and is applying for the age pension, and that member has a higher super balance than the other member who has not reached the qualifying pension age, this can result in a larger portion of assets being tested under the income and assets test than would otherwise have been the case if they had taken earlier measures to equalise the spouse super balances.

Consider the example of Bill and Chloe above, but assume Bill is 5 years older than Chloe and will therefore reach the qualifying age for the age pension much earlier than Chloe. If super contributions splitting had not been adopted, Bill’s super balance (which is included for the purpose of the Centrelink assets and income tests) would be a lot higher, which could potentially reduce his age pension or even deem him ineligible (subject to this overall asset and income position at that time).

4. To utilise the $1.6 million tax free cap

There is a cap of $1.6 million (will be indexed) on the amount of money an individual can use to commence a pension in the tax-free pension environment.

If the individual has a super balance greater than $1.6 million at pension commencement, the excess will stay in the accumulation phase and the earnings on this component of their super balance will be taxable.

It is not desirable to have one member above the $1.6 million tax-free cap, and one member well below that cap. Contribution splitting can potentially play a role in ensuring this situation does not eventuate.

An important point to consider is that a future Government may substantially reduce the tax-free pension cap. This places even greater importance on the issue of equalising spouse balances, to alleviate the risk of future decisions of Government in this area.

Another important point to consider is that an individual with a total super balance greater than $1.6 million is unable to make further non-concessional super contributions. Therefore, if one spouse is over the $1.6 million and one is under, this can potentially reduce the combined level of contributions that they could make to their superannuation fund.

Other Benefits

Whilst not discussed in detail in this article, there are some other potential benefits of equalising spouse super balances, including the following:

1. Estate planning – specifically the ability to retain a higher amount in the tax concessional super environment by equalising spouse balances, due to the operation of the $1.6 million Transfer Balance Cap.
2. Access to two low-tax thresholds if lump sum benefits are withdrawn by individuals (if eligible) between their preservation age and the age at which lump sum withdrawals become tax free – which is currently 60.
3. Eligibility for use of catch up of unused concessional contributions, currently available for individuals with total super balances below $500,000.

As is evident from the above summary of the advantages, the earlier that you commence super contribution splitting, the greater impact it can have by the time you reach your preservation age and look to start accessing your super benefits.

The Timing of Super Contributions Splitting

Contribution splitting can only be actioned in the year following the end of the previous financial year.

Example: Bill had employer super contributions to his SMSF of $15,000 for the 2017-18 financial year. He wants to split $10,000 to Chloe, his spouse. Bill must elect for this split to occur during the 2018-19 financial year.

There is an exception to the above rule which allows splitting during a financial year when a member is rolling over their entire super account balance to another super fund, or is commencing a pension.

What Documentation is Required

The appropriate ATO designed form in relation to superannuation contributions splitting must be lodged with the super fund during the 12 months after the end of the year in which the contributions are made.

We also recommend having a trustee minute in place confirming the split of contributions.

We can attend to preparation of the relevant documentation based on your instructions.

Other Notes

• Another measure that can assist with equalisation of spouse balances is a recontribution strategy. This type of recontribution strategy involves withdrawing an amount (if eligible) from the member account of the spouse with the higher super balance, and putting it back into the member account of the spouse with the lower super balance - as a non-concessional contribution, subject to the relevant contribution caps and ages of members.

• This article is based on current legislation, which is subject to constant change.

• It is always recommended to seek advice to determine whether a superannuation strategy can and should be adopted by you.