Looking beyond individual financial planning
The superannuation caps proposed in the 2016 Federal Budget emphasise the need for financial planners to review options available to both partners rather than just the individual to maximise benefits, Vanissa na Ranong writes.
The May 2016 Budget proposals, which are subject to the legislative process, included three key superannuation caps:
- A $1.6 million transfer cap;
- A $500,000 lifetime non-concessional cap (applied to non-concessional contributions made from 1 July 2007); and
- A reduction in the concessional cap to $25,000 (irrespective of age).
The proposed caps highlight the importance of looking beyond the individual client and reviewing the options available to both partner and spouse. According to Budget 2016, "the median superannuation balance for a woman is around 65 per cent of the median superannuation balance for a man".
Financial Planning Opportunities
Review of individual and spouse arrangements can enable:
- Ongoing access to concessional superannuation treatment;
- Earlier achievement of preservation age and potentially a condition of release;
- Sheltering of superannuation from the Assets Test;
- Access to two low-rate thresholds;
- Enhanced access to tax offsets;
- Payment of spouse insurance premiums; and
- Equalisation of tax-effective post-retirement income.
Spouse Superannuation Tax Offset
Contributions made into a spouse's account count towards their non-concessional cap.
A taxpayer is able to claim a tax offset for non-deductible contributions of up to $3,000 made on behalf of a low income or non-working spouse.
The offset is available if the total of the spouse's assessable income, reportable fringe benefits and reportable employer contributions (including salary sacrifice contributions) is less than $13,800. The maximum tax offset of $540 applies if the spouse's income is less than $10,800.
For a taxpayer on the marginal tax rate of 19 per cent, the $540 rebate received in return for the $3,000 contribution to a low income spouse equates to a guaranteed return of 18 per cent.
The offset is the lesser of:
- ($3,000 — (spouse income — $10,800) X 18 per cent; and
- (Total spouse contributions in that year) X 18 per cent.
The May 2016 Budget proposes retention of the existing maximum rebate of $540 but increases the spouse income level to $37,000, fully shading out at $40,000.
Spouse Splitting
Up to 85 per cent of taxed splittable concessional contributions and 100 per cent of untaxed splittable contributions can be split to a spouse.
As the split contributions are captured in the originating concessional cap, the value of the contributions-splitting superannuation benefit is not counted within the receiving spouse's contribution caps.
To access spouse splitting, the spouse must be:
- Under preservation age, whether working or not; or
- Between preservation age and 65 years or age and not permanently retired from the workforce.
Generally, one split is permitted for contributions made in the previous financial year. The split can be made in the current financial year if the member's entire benefit is to be rolled over, transferred, or cashed in that year.
- Up to $29,750 can be split for the 2015/2016 financial year, subject to the completion of the splitting request, by 30 June 2017.
Administratively, an applicant intending to claim a tax deduction for the concessional contribution must complete the deduction prior to the spouse splitting request. Spouse split requests must also be made prior to rollover of funds.
Example — Accessing the Low Rate Cap
Stephen and Lisa are considering retirement.
Lisa has just recently turned age 56. She earns $100,000 per year and has undertaken salary sacrifice during the course of her career. Her spouse, Stephen, is 58.
Concessional contributions of $300,000 have been made during the course of Lisa's career, and the couple would like to fund their planned home renovation of $300,000.
As Lisa has reached preservation age, upon retirement, her superannuation funds will become unrestricted non-preserved.
She is able to access the low rate cap, currently $195,000, to assist with her home renovations. Tax would be payable on the balance ($105,000) at 15 per cent + Medicare Levy.
If she had undertaken ongoing spouse splitting, she would have been able to split up to $255,000 to her spouse, Stephen. The required renovation funds could then be withdrawn fully tax-free, saving Lisa $17,850 in tax.
Spouse and Age Pension Assets Test
The Centrelink Assets Test excludes the superannuation of a spouse who is under Age Pension Age.
Accordingly, a popular Assets Test strategy has been to utilise the Age Pensioner's assets to undertake a contribution into the spouse's superannuation. For part-pensioners subject to the Assets Test, the strategy may be critical given the doubling of the taper rate from $1.50 to $3.00 from 1 January 2017.
Senior Australian and Pension Tax Offset (SAPTO)
The Senior Australians and Pension Tax Offset (SAPTO) can be claimed if a client is eligible to receive an Australian Government Pension or similar payment from Centrelink or the Department of Veterans' Affairs (Condition 1), and satisfy the SAPTO income rules (Condition 2).
Condition 1 is also satisfied if a client satisfies the Centrelink Age Pension age requirement, but did not receive it because the client did not make a claim or due to the application of the income test or the assets test, and one of the following conditions is satisfied¹:
- You have been an Australian resident for Age Pension purposes for either 10 continuous years or for more than 10 years of which five years were continuous;
- You have a qualifying residence exemption (because you arrived in Australia as a refugee or under a special humanitarian program);
- You are a woman who was widowed in Australia (at a time when both you and your late partner were Australian residents), you have made a claim for the Age Pension and you had two years' residence immediately before your claim;
- You received a widow B pension, widow allowance, mature age allowance or partner allowance immediately before turning Age Pension age; or
- You would qualify under an international social security agreement.
The maximum SAPTO available is $1,602 per individual for a couple living together, and if the spouse is also eligible, the unused tax offset can be transferred to an eligible spouse.
The SAPTO tests rebate income, which includes:
- Total Taxable Income;
- Adjusted Fringe Benefits (Total fringe benefits X 0.51);
- Reportable Employer Superannuation Contributions;
- Deductible Personal Superannuation Contributions; and
- Net Financial Investment/Property Losses.
A couple will be tested on combined rebate income, and then individually assessed to calculate the applicable individual rebate. The tax offset reduces by 12.5 cents for every $1 of income above the lower threshold as shown in the table below.
Case Study
John is 65 and is now eligible to receive a part Age Pension. He owns a garage jointly with his younger wife Jenny and plans to continue working. The prevailing test is the Income Test, given that their current income is $60,000 per annum. John's current SAPTO rebate income, including the Age Pension and investment income is $33,776.
John and Jenny wish to access the Age Pension and grow their superannuation savings.
John and Jenny's strategy balances his Age Pension entitlement with the available tax concessions:
- Part of his superannuation is now sheltered in Jenny's superannuation account, by withdrawal and re-contribution into Jenny's account, reducing his deemed income;
- Part of his superannuation is used to commence an account based pension, to access the zero per cent tax on earnings growth;
- Business income is restructured to adjust John's total rebate income, including the new Age Pension, to $28,974, so he can access the full SAPTO. Jenny's salary is increased — their combined rebate income of $64,118 is below the upper rebate threshold of $83,580 (2 X $41,790); and
- Jenny continues to salary sacrifice and both make non-concessional contributions to access the government superannuation co-contribution.
John is able to claim the full Low Income Tax Offset (LITO) and SAPTO and Jenny is able to claim the LITO, minimising their tax liability.
Combined strategies currently available to couples provides opportunity to enhance the current tax, superannuation, and Centrelink benefits available to the family unit. Should Budget 2016 become legislated, financial planners will need to more carefully consider the placement of superannuation contributions across both the client and spouse.
FOOTNOTES
1) ATO website accessed 22/7/2016: https://www.ato.gov.au/Individuals/Tax-return/2015/Tax-return/Tax-offset-questions-T1-T2/T1-Seniors-and-pensioners-(includes-self-funded-retirees)/
Vanissa na Ranong is the head of technical services at Fiducian Financial Services.
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