In a monthly column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.
It often surprises me how rarely we see ‘spouse contribution splitting’ in SMSFs. Perhaps it’s more common in large APRA funds but it’s certainly not so in SMSFs.
Spouse contribution splitting is that special rule that effectively allows someone to ‘give’ some of their super contributions to their spouse. There’s a process – more on that later. Don’t confuse it with the super splitting that happens when couples separate/divorce – this particular form of splitting is all about sharing growth in super while you’re together.
It’s only possible for concessional contributions so it’s limited to the contributions counting against the smaller cap of $27,500 (such as employer contributions, personal contributions where a tax deduction is claimed). Perhaps that’s why it’s not done much – it feels quite small fry as strategies go, not something that will set the world on fire.
But my own experience is that it can really add up – my husband and I did this for years and I’ll explain why shortly.
But first a brief run down on the process.
There are broadly four steps and – of course - rules.
1. The contributing spouse’s concessional contribution
First, contributions are made for the ‘contributing spouse’ (I’ll use that term even though often we’re splitting employer contributions, so they weren’t actually contributed by that spouse). As mentioned earlier, concessional contributions can be up to $27,500 per year.
Because these contributions get taxed at 15% in the fund, the maximum amount that can be split is 85% of the contribution (say $23,375 for someone who’s had contributions of $27,500). It’s worth knowing, though, that sometimes the contributing spouse might be allowed extra concessional contributions because they’re eligible to use rules that let them look back over the last 5 years and use up any concessional contribution caps they didn’t use back then. If they can use those rules to contribute (say) $100,000 this year, then $85,000 (85%) can be split to their spouse. (They could also choose to split less – there’s no rule saying that if you want to use the splitting rules you have to give all your concessional contributions away.)
The one thing that can’t be split is any ‘excess’ contributions (contribution amounts over the cap, whatever that cap happens to be).
The only rule the contributing spouse has to meet is they need to have been allowed to make the contribution (and claim a tax deduction) or have their employer make it for them. Of course, that in itself comes with some rules (for example, people over 67 can’t make claim for a tax deduction for their personal contributions unless they meet a work test, people over 75 often can’t have contributions at all).
But as long as those rules are met, there are no other limitations based on the contributing spouse’s age, whether or not they have retired, where the contribution comes from (personal, salary sacrifice, Super Guarantee) or how much they have in super.
2. Waiting until the following financial year to split
The second step is usually…. waiting.
Generally, contributions can’t be split in the year they’re made, they can only be split in the following year. (The idea is that you look back to see exactly how much was contributed over the whole year and then do one election to split, based on the total.) There are some exceptions – for example, a contributing spouse who moves all their super to another fund would need to do their splitting before moving (you can only split if you still have the money in the fund that received the contribution).
3. Rules for the receiving spouse
The third step is that the contributing spouse makes an application to split their contributions. This is when things get slightly trickier – the receiving spouse has to meet some extra rules. They definitely have to be under 65. And if they’re over their ‘preservation age’ (in future, this will pretty much be age 60), they can’t be retired. Fortunately, the law for contribution splitting is all about being retired ‘now’. So, someone who retired in the past could ‘unretire’ if they wanted to use the splitting rules (and they don’t have to go back to work to do this). The one thing to watch is that you can’t say on the one hand you’re retired (so you can access your super) but on the other hand that you’re not (so you can use the contribution splitting rules) all at the same time.
These conditions have to be met at the time the application is made, not when the contribution is put into super.
4. Transferring the funds
Then lastly (fourth step), the super fund actually moves the money from the contributing spouse’s account to the receiving spouse’s account. This is really easy in an SMSF – just accounting entries, so the fund doesn’t need to have enough cash to make a physical transfer as long as both members are in the same fund.
So, who uses this?
Often, it’s used to even up super balances where it’s clear one member of a couple is going to have a lot more in super than the other. For example, let’s say there’s one high income earner (maxing out their $27,500 cap every year with salary sacrifice contributions) and one lower income earner (with compulsory super at a much lower rate). To make sure they still build up their super roughly evenly, they could use contribution splitting to ensure that roughly the same amounts were adding to each member’s account.
I used it differently. My husband reached his ‘preservation age’ 10 years earlier than me. So, for a long time, we ‘split’ all of my concessional contributions to his account knowing that it would mean ‘our’ super was accessible to us earlier. (And at that time, we’d even up our super balance).
Others will think about it from an age pension perspective. Super assets don’t count in the assets or income test for the age pension until they’re either turned into a pension, or the member reaches age pension age (67). That means some couples might split contributions to the younger spouse, so their super is initially kept out of sight from means tests when the older spouse turns 67.
Or what about people who want to use those special rules I mentioned earlier about ‘catching up’ on old concessional contribution caps they haven’t used in the past? They’re only possible for people with less than $500,000 in super. Someone who is rapidly approaching $500,000 might split concessional contributions to their spouse (who is either well short of this cap or already over it) to make sure they stay under $500,000 for as long as possible. The same general principle could apply for people close to other important thresholds (for example, non-concessional contributions are only possible for people with less than $1.9 million in super).
The timing can get tricky here and it’s definitely a strategy that adds value in small amounts each year rather than all at once – so something to think about early.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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