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Sharing the wealth
Recent legislation has created new opportunities for members who are looking to share and optimise their retirement nest egg.
The recent Federal Government legislation that allows eligible members to split their super contributions with a spouse is welcome news indeed. In this article we’ll explain the nuts and bolts of splitting and explain why it’s such a positive development.
Simply, super contribution splitting allows members to transfer or rollover certain contributions to their spouse’s super account. The rules allow couples to use two eligible termination payment low rate thresholds, plus two reasonable benefit limits. This means couples may save more super at the concessional tax rates and it also creates opportunities for tax effective income splitting in retirement.
But there are conditions. Both a member and a spouse must satisfy eligibility criteria, plus there are rules about what can be split and when. Only accumulation fund members and some defined benefit (DB) members can participate. DB members can only split contributions made to their additional accumulation account (ie, non-defined benefit component) if they have one. Only contributions made on or after January 1, 2006, can be split, and existing account balances cannot be split.
While it’s not compulsory for a trustee to offer super contribution splitting, Mercer believes this new option gives members more freedom in managing their retirement savings.
What can members split?
Members may split with their spouse:
* 85 per cent of employer and salary sacrifice contributions made on or after January 1, 2006; and
* 100 per cent of personal contributions made on or after January 1, 2006. (Including member and eligible spouse contributions and government co-contributions.)
They can’t split amounts that are rolled over, transferred or allotted, lump-sum payments from an eligible non-resident non-complying super fund or employer eligible termination payments.
When can members split?
The super contribution splitting rules took effect on January 1, 2006, and will work on a financial year basis, which means:
* the first year of operation comprises the six months from January 1, 2006, to June 30, 2006. Only super contributions made during that period can be split for that particular year.
* generally, members will be able to split once per year and will have 12 months to make a request to split all or part of a previous year’s contributions once that year is over. (Members split in the current tax year if all of their benefits are being paid out.)
Who can and cannot split?
Generally, the following eligibility rules will apply:
* members can split with a spouse who has not attained their preservation age;
* members cannot split contributions with a spouse who is aged between their preservation age and 65 years and has satisfied a retirement condition of release; and
* members cannot split contributions with a spouse who has already reached age 65.
Also, members can only split contributions with a person of the opposite sex to whom they are legally married or in a genuine de facto relationship.
To see the value of super contribution splitting, it helps to take a step back. There have been many recent changes to Australia’s retirement system, such as the improved super co-contribution scheme, abolition of the super surcharge and new transition to retirement rules. Sure, splitting works on its own, but it works very well in combination with these other strategies.
John and Jill combine strategies
John earns a $65,000 package — receiving $59,633 as salary ($44,989 after tax) and super guarantee contributions of $5,367. While he has already accrued $300,000 in super savings, his wife, Jill, has none. At age 58, John is happy to keep working full-time but wants to boost his super and give Jill super of her own.
John decides to keep $25,000 in salary and increase his employer contributions to $40,000 by salary sacrifice. He then splits the after tax super contribution amount of $34,000 to Jill’s super account. To supplement the reduced income resulting from his $40,000 contribution, John taps into his existing $300,000 super balance. He commences an allocated pension and receives the minimum annual income of $15,000. This increases his income to $40,000 or $33,790 after tax and Medicare per annum.
Members should seek professional assistance
As the case study shows, determining the appropriate amount to transfer to a spouse depends on various factors including the financial goals and circumstances of both partners, as well as tax and preservation issues. This is why Mercer is recommending trustees encourage members to seek qualified financial advice. Members need to determine their eligibility, their life goals and the potential financial risks and rewards. With the rules affecting money and family, it’s not a bad move to have a comprehensive estate plan too.
Bronny Speed is chief financial adviser and a Certified Financial Planner with Mercer Wealth Solutions, [email protected].
AUTHOR
Mike Taylor
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