You may have heard the term ‘contribution splitting.’ It is a term that is often used when a couple get divorced – and they split all of their assets, including their super.
But ‘super splitting’ is also available to couples who remain together. A member of certain super funds is permitted to split some of their contributions between themselves and their spouse. They do this by transferring the contributions they have made from their super account to their spouse’s account.
The purpose of this rule was to recognise that (typically) female spouses have restricted work patterns compared to their male partners. Women often take time off work to have children and raise the family, which prevents them from accumulating significant amounts in their own super account. This concession is designed to recognise and address this imbalance.
The rules allow for up to 85% of a concessional contribution (that is, the amount that is left after tax) made in the previous financial year to be transferred to the spouse’s account. The funds that are transferred to the spouse are treated as a ‘rollover’ and not as a contribution, and so they do not get taxed again in the hands of the recipient fund.
Here is how it works for an employee receiving contributions (pre-tax) of $10,000 in a given year. We are using a husband as the employee and a wife as the partner – but the money can flow in either direction:
As the funds were initially a concessional contribution, the funds will be an entirely taxable component and form a part of the recipient spouse’s taxed element in their fund. (Don’t worry if that is too technical: this is not the main point of this article!).
While splitting was first introduced to allow for a non-or low-earning spouse to effectively be superannuated, it is often used for more pragmatic reasons. There is no rule that benefits need to flow in a particular way (for example, from the member with a higher balance to a member with a lower balance). So, one common strategy is for a younger partner to split his or her contributions to an older spouse. The benefit here is that the money will generally become available sooner by doing this.
Other common reasons for super splitting include:
- using the contributions in the recipient’s fund to purchase risk insurance for that person;
- managing the total superannuation so as to maximise the couple’s access to the low rate threshold;
- maximise Centrelink entitlements by deliberately minimising the super balance of one or the other spouse; or
- (for the more fortunate) to ensure that one partner’s super stays below the proposed threshold for tax-free earnings on pension benefits (the proposed limit is $1.6 million).
What you need
In order to complete a successful super split, you need two things:
- A spouse (which can be a marital partner as well as a de facto partner) who has not reached preservation age; and
- One or two super funds that allow the split to occur (the split must be agreed to by each partner’s fund, as the funds have to facilitate the rollover). This is particularly easy if the fund is an SMSF.
Getting it right
As with all things to do with super, there is documentation that must be completed and rules that must be complied with. The time at which the split occurs, the type of benefit to which it applies and the process for transferring the money can all vary according to your specific situation.
So, we recommend that you do not DIY your super splitting. Talk to us if you think that splitting is something that would make sense for you.