The superannuation landscape is about to change significantly following the May 2016 Federal Budget announcement. Although the proposals are not yet law, it seems certain that whatever the final outcome, the reforms will target members with large super balances.
With the proposed $1.6 million cap per member on amounts that can be held in pensions with tax-free earnings, it is important for all family groups to continually monitor their retirement plans. This is especially so when actively accumulating superannuation to ensure that their balances are ‘evened out’ as best as possible.
Enter superannuation splitting.
This allows a member to elect to transfer their prior year’s concessional contributions after tax to their spouse. This is provided the spouse is under preservation age or between preservation age and 65 but not retired.
Traditionally, the reasons for splitting have been:
- Ability to utilise the tax-free threshold (currently $195,000) for both members on any lump sum withdrawals made prior to 60;
- Ability for a low-income or non-working spouse to access insurance within the super environment by using the splitting to pay for the premiums; and
- Where there is a significant age difference, depending on circumstances:
- splitting to a younger spouse may allow the member to maximise Centrelink benefits, and
- splitting to an older spouse may allow the spouse to access super benefits earlier.
While these reasons remain valid, this strategy now presents some broader planning opportunities for couples holding disproportionate amounts in super.
Typically, a middle-aged couple actively contributing to their super may have one spouse who has been able to maximise contributions and build up a sizeable balance while the other has had limited capacity to do so.
By splitting the contributions to the spouse with the lower balance, the couple is future-proofing against potential taxes on earnings generated from the member’s higher balance.
For a self-managed superannuation fund to implement this strategy, it must be allowed for in its trust deed. It is not a one size fits all and will depend on personal circumstances.