Could super splitting with your spouse help you get more out of retirement?
29 January 2021
Super splitting is one method couples can use to help distribute superannuation contributions between their accounts, potentially helping to ensure both members get the most out of their retirement nest eggs.
So, how does super splitting work, why would couples use it and what are the legalities of this strategy?
What is super splitting?
Super splitting is an agreement between you and your super fund to divide contributions between you and your spouse or de facto partner’s super accounts. This can help you to each grow your own wealth, even if you are on different incomes. To apply for super contribution splitting, you will need to contact your super fund to see whether your fund allows it and whether it charges a fee.
Why would a couple consider super splitting?
There are a range of reasons why you and your spouse may consider super splitting, particularly if one spouse is not working or earning less. Some reasons include:
To maintain life insurance
You could split contributions to your spouse’s account to help them pay for insurance within their super account, such as life insurance. This could be beneficial if, for example, they want to keep the insurance but would otherwise struggle to pay for the premiums due to having a low super balance.
To gain access to super earlier
Splitting contributions to an older member who has access to their super earlier than their younger spouse may give a couple the ability to access tax-free money from their super earlier than expected. Conversely, splitting contributions to a younger member may help the older member reduce their balance and potentially qualify for a higher age pension payment, due to the way Services Australia’s assets test works.
To help keep super balances under ATO thresholds
Splitting your contributions with your spouse could be a great strategy to even out super balances between the two of you and keep both balances under thresholds imposed by the Australian Taxation Office (ATO). For example, keeping both members’ balances under $500,000 means that each member can take advantage of the 'carry forward’ concessional contribution rules to maximise their before-tax contributions prior to retirement.
Additionally, the transfer balance cap means there is a limit on how much superannuation can be transferred from your accumulation superannuation to a tax-free ‘retirement-phase’ account. Splitting contributions to ensure one or both members stay under the $1.6 million transfer balance cap could help maximise the amount of money they can receive tax-free in retirement. Keeping your super account balance under the $1.6 million transfer balance cap also opens the possibility of using ‘carry forward’ non-concessional contributions to potentially increase the amount of money in your super before you retire.
Who is eligible for super splitting?
Contributions can only be split to a spouse who is either under the age of 65 and not retired, or under their preservation age regardless of their retirement status. The ATO defines a spouse as someone you are either:
Legally married to.
In a relationship with (that is registered under certain state or territory laws).
Living with on a genuine domestic basis in a relationship as a couple (known as a ‘de facto spouse’).
Who is super splitting most suited to?
A super splitting strategy is typically most suitable for couples under the age of 65 that have one high-income earning member and one low-income earning or non-working member. Additionally, it could be suitable for couples where one member has a higher superannuation balance than the other and they wish to even up their balances for retirement purposes.
What contributions can be split and how?
Only certain super contributions can be split with your spouse. These include:
Salary sacrifice contributions.
Personal contributions where a deduction can be claimed.
The ATO calls these contributions ‘taxed splittable contributions’, which means you can split the lesser of:
85% of the taxed splittable contributions made in that financial year, or;
Your concessional contribution cap for the financial year ($25,000 for 2020/2021).
Examples of contributions that can’t be split include:
Contributions you make with a personal injury election.
Transfers from foreign funds.
According to the ATO, if you have a balance below $500,000, you may be eligible for carry forward concessional contributions. So, for a given year, the amount you can split may be higher than other years.
If you are a member of a public sector super scheme, your employer contributions may be ‘untaxed splitable employer contributions’. This means 100% of these contributions can be split to your spouse as long as it is below the concessional contribution cap for that year.
How do you apply to split super contributions?
The ATO recommends contacting your super fund to check whether it offers contributions splitting, charges a fee for it or has its own application form you need to use.
If your super fund does not have its own application form, complete the ‘Superannuation contributions splitting application’ form, which is found on the ATO website, alongside detailed instructions to assist with completing your application, and send it to your super fund.
The ATO says applications to split contributions should be submitted to your super fund via the form available on their website in the financial year after the contribution was made to one super fund.
For example, for contributions made in FY 2020/21 (1 July 2020 – 30 June 2021), you would submit one application the following financial year – FY 2021/22 (1 July 2021 – 30 June 2022) – to split all contributions made in that financial year.
However, if the spouse receiving the contribution is retiring or rolling out of their fund and will be drawing down their entire balance at once, the application should be submitted in the same financial year in which the contribution occurs.
If you intend to split super before a deduction can be claimed in your personal tax return, you must submit a ‘Notice of intent to claim or vary a deduction for personal super contributions’ form found on the ATO website to your super fund prior to submitting your super splitting form.
You can only apply to split your contributions once per financial year.
How does taxation apply to super splitting?
Any split contributions will still count to the contributing spouse’s concessional contributions cap. Similarly, any deductions that can been claimed for contributions that have been split, will still be claimed as a deduction in the contributing spouse’s tax return.
What to keep in mind about super splitting
Super splitting is a complex strategy that won’t be suitable for everyone. Before splitting your super contributions with your spouse, you should consider seeking professional advice from a licensed adviser to ensure it is the most appropriate strategy for both of you to meet your retirement goals.
Other things to consider:
Not all super funds will allow super splitting. Most self-managed super funds (SMSFs) and APRA-regulated funds will offer super splitting, but you should check your fund’s trust deed or contact your super fund to determine if it is an available strategy.
Check with your fund whether it has any specific forms that need to be used rather than the generic ATO forms.
Fees are set on a fund-by-fund basis and will be different for all funds and accounting firms. Check with your fund whether this strategy will incur any fees.
This article was originally published onCanstarasA guide to superannuation splitting with your spouse.