Contribution splitting – a little pain for a big gain

SMSF technical expert and columnist for The Australian newspaper
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Splitting contributions with your spouse isn’t something most of us would think too much about, because with super tax-free after 60, there doesn’t seem much point.

However, contribution splitting is actually quite easy to implement and might save you tax at some stage in the future. The downside risks, as in administrative hassle and cost, are quite low but the upside benefits, as in possible tax savings, are probably worth the effort.

The act of splitting contributions is not quite the same as making super contributions for your spouse, which the super laws also permit in certain circumstances.

Splitting contributions with your spouse involves you taking particular types of contributions made by, or for you, during a financial year and then moving them into your spouse’s super fund member account.

The reasons why

In simple terms, there are three reasons to do this.

  1. You might have the majority of super money in your fund, and not your spouse’s, and it doesn’t make sense to have your affairs unbalanced in this way. For example, if you were to die or become permanently disabled, all the money in your super account would have to be paid out of your fund. If some of your money was in your spouse’s account, then you might find this more tax advantageous.
  2. Some super fund tax measures – for example, tax that applies to lump sums paid before age 60 – are based on how much you can take out (the first $180,000 of the taxable component is tax free). By splitting your contributions with your spouse, you reduce the money in your super account, thereby potentially reducing the amount of tax payable.
  3. The last reason is related to the second purpose – no one knows what sort of new tax measure future governments will put in place and how it will apply. For example, the pension tax measure – to tax pension income exceeding $100,000 – announced by the former Gillard government in May this year is a case in point. We don’t know what the Abbott government thinks of this policy. Splitting contributions takes money out of your account, which might reduce your exposure to similar tax ideas. Splitting contributions is a bit of ‘insurance’ against future tax policy nasties.

How to do it

So having considered if any of all of these ideas apply, you now need to know how to implement contribution splitting. There are six basic steps to follow.

  1. Please check your fund’s trust deed. If your fund has an old trust deed, chances are it won’t allow contribution splitting.
  2. Next you can only split contributions with someone who is your bona fide spouse at the time the contribution splitting documentation is completed.
  3. Your spouse must be under age 55 at the time the contributions are split. If your spouse is aged at least 55, but under 65, then they can’t be retired. If your spouse hasn’t worked in paid employment for many years, then I suggest you take advice about their work status, as this can be a tricky area. As the person splitting the contributions, the super laws allow you to be any age.
  4. You need to lodge a contribution splitting document with your fund immediately after the financial year in which the contributions were made. For example, you split 12/13 contributions during the 13/14 financial year. Just remember if you intend to take all your super benefits out of a fund during a financial year, special rules will apply to splitting those contributions.
  5. Next, you can only split concessional contributions – i.e. employer contributions (the compulsory 9.25% and salary sacrifice) or for the self employed, personal super contributions that have been claimed as a tax deduction. You can only split the lesser of 85% of the total concessional contributions made and your concessional cap for the year. You can’t split non-concessional contributions.
  6. Finally, you split contributions using a special ATO form found at the following link – http://www.ato.gov.au/content/downloads/SPR86436n15237.pdf

As can see, this is a relatively easy process. It might not save you much tax – there’s a chance it won’t save you any. But for a relatively low cost transaction, it’s probably worth the risk.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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