One of the less known strategies we frequently use is superannuation splitting. It’a relatively simple concept and I think the potential benefits are often overlooked or not completely understood. We take a quick look at what super splitting is, how it works and who it can benefit.
What is Splitting?
Super splitting provides the opportunity to split up to 85% of concessional (employer & salary sacrifice) contributions received in a financial year with their spouse. Why 85%? It’s just 100% less 15% contribution tax, as the process assumes the tax is paid before you split.
As a general rule the split is permitted in the financial year after the contribution has been received by the fund. E.g. you can split contributions made in 2016-17 year anytime from 1 July 2017 to 30 June 2018. However, where a member is closing or rolling over their account in the fund, the split can take place in the year of the concessional contribution.
Why would super contribution splitting be used?
There are several advantages of splitting, including:
- to help ‘equalise’ super account balances between spouses
- to help keep both account balances below $500,000 so you can use ‘carry forward’ concessional contributions
- to help keep an account below the $1,600,000 Transfer Balance Cap
- to provide super to a non-working or low-income spouse
- to get access to super earlier by splitting contributions to the older spouse
- to improve potential Age Pension entitlements by splitting to the younger spouse
- to protect from the impact of future tax changes (e.g. the proposed 15% tax on pension income above $100,000 which fortunately didn’t eventuate, but it may resurface again in the future)
How to make split
To make the split, a member completes a form (available on the ATO website) and elects the amount he or she wishes to split. Contribution splitting is subject to the rules of the fund. Generally, the receiving spouse must be under age 65 and not retired.
Rollovers and non-concessional contributions cannot be split.
Eric (44) has $290,000 in his super fund and his wife Catherine (44) has $130,000. Below is a summary of the difference in their respective account balances with splitting and without splitting
|Age||44 yrs.||65 yrs.||44 yrs.||65 yrs.|
|Balance with splitting||$290,000||$1,284,000||$130,000||$1,600,000|
|Balance without splitting||$290,000||$2,326,000||$130,000||$575,000|
Assumptions: $25,000 pa concessional contributions for next 20 years. 7% pa earnings rate. No indexation to annual concessional contributions cap
So by splitting their super contributions, they both stay below the $1.6m Transfer Balance Cap and Eric is able to utilise the carry forward concessional contributions for 5 years longer (as his balances takes 5 years more to exceed $500,000).
Super splitting generally costs nothing (check with your own super fund for details) and can be of great value to longer term planning. If you would like to talk about boosting your super or managing your ‘cap’ by using super splitting, please call me on 02 9913 9995.
What Can Align Financial Do For You? Visit our homepage to learn more about our service. If you would like to speak to us about your financial circumstance, please feel free to give us a call on 02 9913 9995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.