Super splitting: couples set for real benefits

A fantastic financial planning opportunity is waiting ahead. We have been promised and teased for a few years about the prospect of splitting superannuation contributions among spouses. But the day when we can use this strategy may be drawing closer as a Bill has recently been introduced into the House of Representatives and draft regulations released for comment from interested parties.

These flesh out how the Government’s proposed superannuation contribution splitting will work and, if the Bill receives Royal Assent, it will become law. The proposed start date for superannuation contributions splitting is in respect of contributions made from January 1, 2006.

The concept of splitting superannuation contributions between spouses brings some exciting new financial planning opportunities, which we will examine here.

Effective planning

Super splitting gives couples the ability to plan effectively for retirement. This is often a big issue for couples where one person will be taxed at a higher marginal tax rate than the other in retirement due to uneven superannuation account balances.

Through distributing superannuation benefits more evenly, it may be possible to lower the effective marginal tax rates of a couple in pension phase, which could deliver significant tax savings.

Reasonable benefit limits

Couples will now have access to two reasonable benefit limits (RBLs). This effectively doubles the amount that can be received from superannuation at concessional tax rates.

This represents a huge benefit for couples where one person has much more accumulated in superannuation and will exceed their RBL.

In this situation, if the couple could split their superannuation contributions it would enable the other spouse’s RBL to be utilised more, which would allow them to accumulate additional funds that attract other tax concessions associated with superannuation (eg, 15 per cent contributions tax and 15 per cent investment earnings tax) and not pay excessive tax.

Eligible termination payments

The new rules mean couples will have access to two eligible termination payment (ETP) tax free thresholds. This doubles the amount of post June 1983 taxed benefits that can be paid tax free from superannuation (when the person is aged 55 and over) and allows a couple to structure their affairs to take advantage of this opportunity. This could deliver a big tax saving to couples.

Personal insurance

Non-working spouses or those earning a relatively low income can often be overlooked when arranging insurance for a couple. This can sometimes be attributed to the additional money required to purchase the insurance.

Splitting superannuation contributions provides a unique solution to this problem as couples could use the split contribution to fund the cost of insurance within superannuation.

This would not require an outlay of any additional money to fund the cost of premiums, as they can use some of their spouse’s existing superannuation guarantee payments.

Super guarantee payments

It will be possible to divert superannuation guarantee payments in situations where a person’s pension RBL has been exceeded. When a person has an accumulated superannuation balance that exceeds their pension RBL, they have the option of requesting that their superannuation guarantee payments cease.

For people in this circumstance, they could still have the superannuation guarantee paid to their superannuation account, but could request that it be split to their spouse’s account.

The actual rules that surround superannuation contributions splitting are quite straightforward. For couples who elect to take up this initiative, the proposed model is an annual split model, which means contributions made on or after January 1, 2006 will be split in the following financial year after the contribution was made. Couples can also choose to split up to 100 per cent of their personal and employer contributions (for example, superannuation guarantee and salary sacrifice). Rollovers and transfers into a super fund cannot be split.

Practical implications

In order for spouses to be permitted to split superannuation contributions the receiving spouse:

n cannot be aged 65 or over;

n must not satisfy the retirement condition of release; or

n must not meet the permanent incapacity condition of release.

The definition of a spouse includes a de-facto spouse (ie, a person who is not legally married to their partner but living with them on a bona fide domestic basis as husband or wife). The definition of spouse for superannuation contributions splitting purposes does not extend to same sex couples.

When a contribution is split it will be done via a contributions splitting ETP that will go either to an account within the existing fund or to another fund. This will have an eligible service period of zero, which will mean that it will not contain any pre-July 1983 service period.

Therefore, depending on what is split (eg, employer or personal contribution), the ETP will consist of a post-June 1983 component and/or undeducted contributions.

Should the receiving spouse have an eligible service period in their own superannuation account that had a pre-service period, it would be possible to alter the post component.

Timing issues

For people who wish to split personal deductible superannuation contributions, it is important that they are careful of the timing requirements that exist in relation to this specific area, as they will not be able to claim a tax deduction for contributions that are already the subject of a superannuation splitting application.

Therefore, if a person wants to claim a tax deduction for personal contributions and also wishes to split some or all of a year’s contributions with their spouse they must firstly lodge the necessary notice to claim the deduction before requesting that the contributions be split.

It’s also important to note that it is not mandatory for all funds to allow members to split their superannuation contributions, although one would imagine that there may be much benefit in allowing this to be facilitated.

If this initiative becomes law, it will bring a fantastic opportunity for couples and, in particular, those that are on a single income. As a general rule, it is beneficial to start to save early to reap the benefits of compound interest, rather than waiting until close to retirement. Achieving this can be easier with superannuation contributions splitting, even if it only occurs for a relatively short period of time.

Carly O’Keefe is a superannuation specialist at Tower .