Superannuation contribution splitting is commonly used by spouses to optimise conditions on individual limits within the tax-friendly superannuation environment.
The strategy can be implemented within either APRA or SMSF funds, but only between spouses. It also refers to splitting only concessional (pre-tax) superannuation contributions to fulfil a range of financial strategies, including topping up a partner’s retirement fund to even out balances, avoiding excessive taxation, and preparing for means testing for the aged pension.
Superannuation Contribution Splitting Explained
It’s possible for a spouse to make a concessional (before-tax) contribution to their husband or wife’s superannuation balance. This is called contribution splitting.
The total which may be contributed to the spouse’s balance is, typically, limited to the standard annual concessional contribution cap, or $27,500. The contribution is taxed at 15% in the fund, so this reduces the total contribution realised in the nominated fund to be up to $23,375. Any amount under the annual concessional cap may be made into a spouse’s fund each Financial Year.
However, if the contributing spouse has a super balance of less than $500,000 and unused concessional contributions from the last five years, they may contribute up to five times the maximum annual concessional contribution in one Financial Year
You can split superannuation contributions at any age, but the receiving spouse must be either: less than the preservation age that applies to them (regardless of working status) or aged between their preservation age and 65 years, and not retired. This makes contribution splitting effective for single-income families while one spouse takes time off paid work to look after young children.
Why Split Concessional SMSF Contributions?
In many instances, where a partner has a significantly larger balance, splitting concessional contributions helps to bring balances more into line whilst taking advantage of more favourable rates of taxation on lump sum contributions to superannuation versus income.
Splitting concessional superannuation contributions each year can be a clever strategy for individuals with more than $ 1.9 million in superannuation. Once past this threshold, members are not allowed to make any more concessional contributions to their own superannuation balance, but they can make concessional contributions to their spouse’s balance.
In another example, if the Division 296 legislation passes, those with superannuation balances approaching, or over $ 3 million can also make concessional contributions to their spouse’s balance to avoid additional Div 296 taxes.
Of course, it’s always important to remember that if you do exceed superannuation contribution caps, additional tax and penalties may apply. Further, your partner’s SMSF assets may go up or down, so before making contributions, keep the risk of breaching a threshold, and the penalties that apply in mind.
Shifting income into superannuation assets is also an effective means for reducing those items used for means testing when One is approaching 67 and seeking the pension. Some couples may use contribution splitting to shift income to the younger spouse to achieve this.
How To Split Concessional Contributions
Splitting concessional contributions can be completed once each year, in the Financial Year after the concessional contribution was made.
Any total split with your spouse does not reduce your total concessional contributions for that year.
The receiving spouse may make an application to the contributing spouse by completing the Superannuation Contributions Splitting Application Form (NAT 15237) on the ATO website and submitting it to their super fund. The contributing spouse will have to sign a declaration to authorise the process. It’s important that SMSF Deed must allow for contribution splitting and some retain superannuation funds also charge a fee for administration of contributions splitting.
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Why Couples Split Superannuation Contributions:
- Strategic alignment of retirement fund balances between partners
- Maximising concessional contributions between a couple
- Shifting an older spouse’s income into super assets to remove these assets from means testing for the pension when the older spouse turns 67
- Optimising shared superannuation balances whilst minimising tax