Splitting superannuation contributions with a spouse

Andrew Biviano discusses the options available to clients who want to split their concessional contributions with their spouse.

Contribution splitting provides a superannuation member with the opportunity to split a portion of the concessional contributions received within a financial year with their spouse. Strategically, this may provide an opportunity to equalise the amount saved for retirement between the member and their spouse and help to:

• maximise their combined low rate threshold;
• fund insurance premiums for the non-working or low-income spouse;
• access superannuation benefits earlier by splitting contributions to the older spouse;
• improve the client’s Centrelink position by splitting contributions to the younger spouse; or
• take advantage of the May 2010 Federal Budget announcement which extends the $50,000 Concessional Contributions from 1 July 2012 to those with a superannuation balance under $500,000, should they become law.

Superannuation law permits a person to split concessional contributions with an eligible spouse for contributions made in the previous financial year. However, in circumstances where the entire superannuation account is being rolled over or cashed before the end of the financial year, the member can make the application to split the concessional contributions at that time.

What amount can be split?

Under the rules, the maximum amount that a member can split is broadly limited to:

• 85 per cent of the member’s concessional contributions; and
• the concessional contributions cap for that financial year.

It should be noted that contribution splitting is subject to the rules of the fund and is limited to an accumulation fund and the accumulation component (if any) of a defined benefit fund.

What amounts cannot be split?

Amounts contributed to superannuation that cannot be split include:

• benefits rolled over from another fund;
• amounts that were previously rolled over as a contributions-splitting superannuation benefit;
• superannuation lump sums paid from a foreign superannuation fund;
• directed termination payment;
• contributions that are not included in the assessable income of the fund, including non-concessional contributions and CGT-exempt contributions;
• contributions to a superannuation interest that are subject to a payment split or subject to a payment flag under the family law provisions.

For example, during 2009-10 financial year, the following contributions were made to Justin’s superannuation account: based on the contributions made in 2009-10 financial year, the maximum that Justin is able to split with his spouse is 85 percent of the employer and salary sacrifice amounts.

That is 85 per cent x ($4,531 + $6,000) which equates to $8,951.

As illustrated by the example, the amount that can be split is based on the amount contributed and does not include the non-concessional contribution or the government co-contribution.

The timing of a split

An important step in the contribution splitting process is that the contribution must first be contributed to the member’s superannuation fund. It cannot be directly paid to the spouse’s superannuation fund.

As mentioned previously, only after the end of the financial year in which the contribution is made can a member request a contribution split.

However, an exception to this rule applies where the member is rolling over or cashing out their entire benefit. In this case, the split can occur at the time the rollover and cash-out is occurring during the financial year.

Another important aspect is that a member can only make one payment split for each financial year.

This important step means the contribution will be first assessed against the member’s contribution caps for the financial year the contribution is made.

When the contribution is split with the member’s spouse in the following year it will be rolled over as a contributions-splitting superannuation benefit and does not count towards their contribution caps.

Applying this to the previous example, in 2009-10 Justin received concessional contributions worth $10,531 (employer and salary sacrifice) and $500 of non-concessional contributions (the government co-contribution is not counted in either cap).

Consequently, the maximum amount Justin can split in 2010-11 is 85 percent of $10,531 which equates to $8,951. It should be noted that Justin has the entire 2010-11 financial year to request the split, and once that financial year has ended the opportunity to split the previous years contributions is gone.

What are the tax components?

While the proportioning rule (ITAA 1997 307-125) is used to determine the tax-free and taxable components for an ordinary rollover or superannuation payment, a contributions-splitting superannuation benefit is treated differently.

In fact, ITAA 1997 307-140 states a contributions-splitting superannuation benefit is to be 100 per cent taxable and the tax-free component is to be nil.

Who is an eligible spouse?

SISA 10 broadly defines a spouse to be a person to whom the member is legally married, a person in a registered relationship with the member, or a person who, although not legally married to the member, lives with the member on a genuine domestic basis. In addition, the member’s spouse must be:

• Under their preservation age; or
• attained age preservation age but under age 65 and has not met the retirement condition of release.

Accordingly, this means that if a member’s spouse is over their preservation age but under age 60 they must not have permanently retired from the workforce.

If, however, the member’s spouse has attained age 60 and is under age 65 they would need to be employed for at least 10 hours per week. Where these conditions are not met the contribution split would not be valid.

It should be noted that the age and work related issue is one that is relevant to the member’s spouse and not the member.

This therefore allows a member who makes a personal deductible contribution to super the ability to split up to 85 per cent of the contribution to an eligible spouse — one that meets the work and age requirements.

In summary, the contribution splitting strategy is one that may help an adviser to reduce the retirement savings gap between spouses without adversely affecting the tax-efficiency obtained where salary sacrifice is used by the higher income earner.

Andrew Biviano is technical services and paraplanning manager at Fiducian Portfolio Services.