Contribution splitting is one of the most underused super strategies despite offering so many important benefits beyond boosting your spouse’s super, and this is mostly due to the lack of awareness of the many super strategies available to them.
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What is Contribution Splitting
What are the benefits of Contribution Splitting
Who is eligible for Contribution Splitting
How much can you split
Do you pay tax on super contributions split with your spouse
Do split contributions still count towards the contribution caps
How to split your contributions
What is Contribution Splitting
Super contributions splitting allows you to split concessional contributions that were made into your own super account and transfer some into your spouse’s super. This can be from employer contributions or voluntary contributions.
Two important points to be aware of, which are related to the contributions being concessional contributions, are:
- If you are splitting personal contributions (as opposed to salary sacrifice), you need to lodge the Notice of Intent (NOI) form to claim a tax deduction before you split, and
- If you are moving to another super fund, you need to split before you move.
Not all super funds permit contribution splitting, so you will need to check whether your super fund offers it.
You also need to check if your super fund has a fee for splitting to cover their costs.
Other ways to add to your spouse’s super include:
- Spousal contributions – contributing to a low-income spouse’s super to get a tax offset
- Concessional or non-concessional contribution from cash that you gave them to contribute themselves.
What are the benefits of Contribution Splitting
This is another way to boost your spouse’s super. And while there is no free money by way of a government co-contribution or tax offset, what you get are the important benefits from equalising super account balances between spouses, which include the following:
- Allowing couples to have a larger combined balance that eventually moves into the zero-tax environment of an account-based pension (where the total balance of each person is $1.9 million, but combined can reach $3.8 million)
- Allowing couples to have more super before the proposed additional 15% tax on the earnings of superannuation balances above $3 million kicks in
- Retaining the ability to use unused concessional contributions for up to the past five years under the carry-forward rule for longer (where your total super balance on June 30 of the previous financial year must be below $500,000)
- Retaining the ability to make non-concessional contributions and to use the bring forward arrangement for longer (where the total super balance must be below $1.9 million)
- Retaining the ability to use the tax offset for spousal contributions for longer (where the receiving spouse’s total super balance must be below $1.9 million)
- With an age gap, splitting to the younger spouse can provide the following benefit:
- Super (in an accumulation account) is not counted towards the age pension tests for those below age pension age. So, for couples with an age gap and where one member is approaching age pension age, splitting to the younger spouse can potentially allow the older spouse to receive more age pension benefits.
- With an age gap, splitting to the older spouse can provide the following benefits:
- Accessing super earlier to retire earlier, have a gap year, pay off debt
- Accessing super earlier to use the income swap strategy to reduce tax (otherwise, you would need to wait until preservation age)
- Getting money into a tax-free environment sooner to reduce tax.
Who is eligible for Contribution Splitting
You can be of any age, but the receiving spouse must be:
- Under preservation age, regardless of whether they are working, or
- Between their preservation age and 65 years and not retired.
For contribution splitting, a spouse is defined as:
- A person who is legally married to you
- A person who lives with you on a genuine domestic basis in a relationship as a couple, or
- A person (of the same sex or different sex) with whom you are in a relationship that is registered under the law of a state or territory.
How much can you split
You can split up to 85% of your before-tax (concessional) contributions each financial year with your spouse.
More specifically, you can transfer up to the lesser of:
- 85% of the before-tax contributions made to your accumulation account in the previous financial year, or
- The amount of your before-tax (concessional) contribution cap for the financial year.
Note that this can potentially be more than the concessional cap, for instance, when using the carry-forward rule.
To use this strategy, your super contributions can only be split in the financial year immediately after the year in which the contributions were made.
Do you pay tax on super contributions split with your spouse
Yes, the reason for the maximum split being 85% is that the other 15% is the tax withheld on all concessional contributions, including the concessional contributions that you later split with your spouse.
Besides that, if instead of using regular (pooled) super investments you use an individually taxed superannuation structure (SMSF, wrap, or a direct investment option like ChoicePlus), you would have to pay tax on capital gains to move, which otherwise, if held until you convert to an account-based pension in retirement, would not have to be paid.
Do split contributions still count towards the contribution caps
Any before-tax contributions you split are still counted towards your concessional contributions cap but not the receiving spouse’s concessional cap.
Tax is deducted from your contributions before it is split to your spouse.
How to split your contributions
Check with your super fund to see if your fund offers contribution splitting.
If so, they will have a form to lodge with them.