Super-splitting contributions with your spouse

I have always been a big believer in equalising super balances between members of a couple to minimise the adverse effects from changes to legislation. The same could also be said for equalising investments both inside, and outside, of the superannuation environment, but that is another story.

Historically, successive Governments from both sides of the political spectrum, have continually tinkered with superannuation laws. This meddling results in constantly changing the goal posts under which financial advisers can provide advice.

Since the introduction of the Transfer Balance Cap in 2017, the importance of splitting super contributions between spouses has considerably increased. In this article, we address the guidelines of Super Contributions Splitting, and how it can be successful as an advice strategy. Using a case study as a practical lens, the improved outcomes can be demonstrated when this tool is used mindfully by advisers and their clients.

Overview

Super Contributions Splitting, which was introduced to the Australian super system from 1 July 2006, allows individuals to split (or transfer) contributions with their eligible spouse. Individuals can split an amount which is the lesser of:

• 85% of a financial year’s “taxable splittable contributions” plus 100% of “untaxed employer splittable contributions”, or

• the concessional contribution cap (currently $27,500 or higher for those able to utilise the carry forward of unused prior year cap amounts).

“Taxable splittable contributions” include Superannuation Guarantee, salary sacrifice and personal deductible contributions but does not include non-concessional contributions.

“Untaxed employer splittable contributions” are employer contributions made on behalf of members of a public sector super scheme. Note, not all public sector scheme’s offer contributions splitting.

Super Contributions Splitting can only be made in favour of a spouse who is under age 65, and if they have reached their preservation age, they must not be retired.

Generally, contribution splitting can only be actioned in the year following the end of the last financial year, and members can only action one split per year. For example, contributions made during the 2021/22 financial year can only be split between 1 July 2022 and 30 June 2023. There is one exception to this rule whereby Super Contributions Splitting is allowed during a financial year when a member is rolling over or transferring their entire account balance to another super fund or to commence a pension.

Since the introduction of the Transfer Balance Cap, strategies that aim to equalise the super balances of a couple, especially Super Contributions Splitting, are now more important than ever. The Transfer Balance Cap imposes a limit on the amount of money that can be transferred to a tax-exempt retirement phase pension, so it makes sense for both members of a couple to take full advantage of this Cap where they can.

Case Study

The following case study highlights the benefits of providing advice in this area.

We recently assisted a financial adviser providing advice to a couple who were the perfect candidates for the Super Contributions Splitting strategy. Steve (45 years) is a Sales Executive working full time and earning a salary of $220,000 per annum. He currently has two super funds with a combined balance of $575,000. Steve’s employer contributes Superannuation Guarantee contributions up to the maximum. Steve also salary sacrifices a portion of his salary so that the combined contributions are just within the $27,500 concessional contributions cap.

Steve’s wife, Cath, is a stay-at-home Mum aged 45, with a super balance of $35,000 and is currently receiving no income or super contributions. The couple have three young children.

The adviser recommended Steve split the maximum allowable contributions to Cath each year which is 85% of $27,500, or $23,375 per annum (indexed at an assumed rate of 3% p.a.).

To accurately illustrate the difference of outcomes, we first projected Steve and Cath’s superannuation balances based on their current circumstances. We then compared this to if Steve was to super split the maximum concessional contributions with Cath each year for the next 15 years (until she has reached her preservation age). The results can be graphically illustrated as follows:

Without contributions splitting

With contributions splitting

In the first instance, it is apparent in this case that Super Contributions Splitting will assist in building Cath’s retirement savings which evidently needs a boost. Based on our 20 year projections, by age 65 Cath’s superannuation balance increases from $111,000 without further super contributions to $927,000 with 15 years of contribution splitting. This alone I believe, is reason enough to recommend Super Contributions Splitting.

The second benefit arises due to Cath’s ability to access her superannuation balance without restrictions once she has reached preservation age, provided she is retired. This means she has unrestricted access 5 years prior to Steve, who will qualify for access when he is 65 years old. Splitting Steve’s super contributions with Cath will therefore provide access to a significant portion of these savings earlier.

The third benefit of splitting super contributions from Steve to Cath lies in the impact of the Transfer Balance Cap. This cap restricts the amount of money Steve can use to commence a pension within the tax exempt pension environment to $1.7m. The cap will of course be indexed but considering a starting super balance of $575,000 together with $27,500 of concessional contributions each year (also indexed) and based on a high growth portfolio that returns 5.95% per annum net of fees and taxes, we anticipate that Steve will have a super balance in excess of the Transfer Balance Cap at age 65.

On the other hand, if Steve and Cath take their financial adviser’s advice and instead split 85% of Steve’s concessional contributions to Cath each year, the likelihood of Steve exceeding the Transfer Balance Cap is reduced before the age of 65. Instead, Cath’s super balance increases to $927,000 with Super Contributions Splitting. Even without retaining the contributions in his own super funds, Steve’s super balance is still a healthy $2.555 million at age 65 and more importantly, Cath’s super balance is less disparate.

Splitting superannuation balances between couples brings with it several secondary advantages to those highlighted above, including:

• Mitigating risks attached with future changes to superannuation taxes that may target higher super balances. Consider the current situation (without super splitting) where Steve has a super balance of $3.37 million at age 65 and Cath a mere $111,000. Imagine the Government at the time lowering the Transfer Balance Cap or any other change which will adversely affect Steve and not Cath, but which may not impact either of them if each of their balances were lower and more in line.

• Less disparate super balances also allow Steve and Cath the opportunity to contribute non-concessional contributions into one or both of their super accounts whilst they are both still under the Transfer Balance Cap. This enables both Steve and Cath to take advantage of the non-concessional contribution cap at any time (or every year) if for example they receive an inheritance, Steve receives a redundancy, or the couple downsize their home at retirement. The flexibility and planning opportunities this may bring is priceless!

• Although this wouldn’t apply in Steve and Cath’s case (hopefully), with long term planning, contribution splitting can result in more favourable Centrelink outcomes. For example, an older member of a couple has split their superannuation contributions with their younger spouse over an extended period of time. This has allowed the younger spouse to build up a sizable superannuation balance (and the older one to reduce theirs). As the older member applies for the Age Pension, the younger spouse’ superannuation balance is exempt from means testing until they attain Age Pension age.

Despite all the above, there are some things to consider before recommending clients commence splitting super contributions with their spouse:

• Not all super funds offer super splitting, and some funds charge a fee for providing this service.
• Some funds will only split to accounts within their own fund and will not transfer split contributions to another super fund. Noticeably, this is not an issue with SMSFs.
• Clients need to apply to their super fund to split the contributions. The application generally needs to be made during the 12 months after the end of the financial year in which the contributions are made.
• If your client has made personal deductible super contributions, they must lodge the appropriate form with the super fund to claim the tax deduction before splitting contributions; and
• Clients cannot split their super contributions if their spouse is aged 65 or over, or if their spouse has reached preservation age and are retired.

Lastly, and probably most importantly, the member of the couple intending to split contributions needs to be comfortable with taking this action.