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All’s fair in love and super: why couples should equalise super

It is common for couples to have very different super balances. If one partner has taken time out to care for children, undertake casual work, or work part-time, the disparity can be pronounced. Super balances will also vary depending on the individual’s age and salary.

But changes implemented by super reforms since 1 July 2017 have brought greater incentives for spouses to consider equalising their superannuation balances, including tax and estate planning benefits.

Some of the major changes

The transfer balance cap limits the total amount of superannuation that can be transferred from the accumulation phase to the tax-free retirement phase.

This cap starts at $1.6 million per individual. Any excess transfer balance amount must be removed from the retirement phase and will be subject to tax. Equalising super between spouses can therefore maximise the amount that can be invested in the tax-free retirement phase and the amount that can be kept in the tax-friendly super environment if one spouse were to die.

In addition, from July 2018, individuals with a total super balance less than $500,000 are allowed to carry forward unused concessional contributions (ie pre-tax super contributions) and ‘catch them up’ in later years.

This rule also creates an argument for equalising super between spouses, so both can potentially use the catch-up concessional contribution measure to maximize their retirement savings.

How to equalise super between spouses

A number of strategies can be used to equalise super balances between spouses, including regular spouse contributions, contributions splitting and recontribution strategy.

If a member’s income is below $37,000, their spouse may receive a tax offset of up to $540 if they make a spouse contribution of up to $3,000 to their spouse’s super each year. If the receiving spouse’s income exceeds $37,000, the amount of the tax offset available starts phasing out and cuts out completely at $40,000.

Couples can also consider contributions splitting, which allows one member of a couple to roll over up to 85% of their concessional contributions made in a year to their spouse.

Another option for couples who have reached age 60 is a recontribution strategy. This involves withdrawing some super benefits from the account of the spouse with a higher balance, by starting a transition to retirement income stream or making a lump sum withdrawal (if a condition of release is met) and recontributing to the spouse’s super account.

These withdrawn funds can then be contributed to the spouse’s account either via a spouse contribution or a personal contribution (ie the spouse making a member contribution for themselves).

Either way, the contribution counts towards the receiving spouse’s non-concessional contribution cap, which is $100,000 per year, or if the receiving spouse is under 65, the bring-forward cap of up to $300,000 may be available.

These strategies can be a useful way for couples to maximise the amount that can be held tax-free at retirement, which is $3.2 million in total. For members in the accumulation phase with a total super balance of less than $500,000, they can also help both members of a couple qualify to make catch-up concessional contributions to maximise their super savings in the lead to retirement.

The recontribution strategy can also be useful for estate planning purposes, as it potentially reduces the tax payable from death benefit proceeds. It may boost an older spouse’s amount of age pension if the older spouse is the person with the higher balance where the younger spouse is under their qualifying age pension age and their super accumulation accounts are not assessed for social security purposes.

Other considerations

The new catch-up rule for concessional contributions will also increase the flexibility of salary sacrifice arrangements.

For example, if Anne receives $5,000 in employer superannuation contributions and does not make any additional pre-tax contributions, she will have $20,000 of unused concessional contributions left in the 2018-19 tax year. This can then be carried forward for up to five years.

For Australians who have been funneling income into other areas, like a mortgage, kids’ education, or paying off personal debt, this new rule provides a welcome way to add more to super when they can afford to.

If both partners have low super balances, for example if both are self-employed, low income earners or recent immigrants to Australia, there may be no need to split contributions. But there are still strategies available to help with maximising super.

Those with income below $38,564 may consider taking advantage of the government co-contribution of up to $500 by making an after-tax member contribution of $1,000 if eligible. The cut-off threshold is $53,564. To qualify, the member must be under 71 and have personal exertion income (such as a salary) of over 10% of their total income.

The increase in the spouse income threshold from $10,800 to $37,000 for spouse contribution tax offset purposes also provides greater incentive for partners to make super contributions on behalf of a low-income spouse. The contributing spouse can potentially claim a tax offset up to $540 per year by making super contributions on behalf of a low-income partner.

Concluding observations

Members of a couple equalising their super balances can bring tax benefits, help with estate planning and boost the retirement nest egg of a partner with minimal retirement savings.

While couples may be concerned about the impact of equalising super in the event of divorce, as super is considered a divisible asset under Australian Family Law, there should be little impact.

There are, however, other risks to consider, such as ensuring no caps are breached and that members meet the conditions required for each strategy.

Given the number of potential strategies on offer and the complexity of some of these, we recommend that anyone who is considering ways to boost their super should seek financial advice.

 

Craig Day is an Executive Manager at Colonial First State. This article is for general information only and readers should seek professional advice on their personal circumstances before taking action.

 

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