Mark Wilkinson, a Superannuation Partner in the Private Client Division at BDO, discusses how superannuation contributions can be split between couples who are starting to plan for their retirement.
Mark will present on the topic, Estate Planning and Superannuation: How to Avoid the Common Mistakes, at the 4th Annual Estate Planning Conference in Sydney on Tuesday, 19 February. And in WA, Pat Kelly, Senior Manager in the BDO Private Clients team, will present on the same topic at the 4th Annual Estate Planning Conference in Perth on Tuesday, 26 February.
If you and your spouse are starting to think about retirement, your number one priority should be financial security and peace of mind for both parties. The easiest way to achieve this goal is to ensure that both parties maximise the amount they accumulate in superannuation over their working life.
However, this is easier said than done. ABS data reveals the unfortunate statistic that women retire with around 37% of the superannuation savings of men. This disparity can occur when women temporarily leave the workforce because of family responsibility, caring for either children, elderly parents or relatives.
What can be done to close the super gap?
One thing that can be done to reduce the impact, from a superannuation perspective, is to consider whether the working partner’s superannuation contribution could be split with the non-working spouse.
Under superannuation law a contribution can be split with their spouse if the following conditions are met:
- The contribution must be able to be split.
- The application to split the contribution must normally be made in the financial year after the contribution is received by the fund.
- The spouse to whom the contribution is been split must not have reached either 65 years of age or their preservation age and retired.
What type of contribution can be split?
- Superannuation guarantee
- Salary sacrifice contributions
- Deductible personal superannuation contribution (a.k.a personal concessional contribution)
- An amount treated as a concessional contribution, resulting from an allocation from a contribution reserve.
How do you split a super contribution with your spouse?
For example, Max and Sally just had their second child during the year ended 30 June 2018. As Max earns a larger salary than Sally, they have decided that Sally will leave the work force for a period of three years, until such time the youngest child can be enrolled in pre-school.
Max has decided to contribute the maximum deductible super contribution of $25,000 each year commencing 30 June 2019. As Sally leaves the work force prior to 30 June 2018 and will not contribute to super during the year ended 30 June 2019, Max would be able to apply to the trustee of his superannuation fund to split the concessional contributions he made in the 2018 year during the year ended 30 June 2019.
The maximum amount that could be split from Max’s superannuation account to Sally’s in this instance is 85% of the $25,000 concessional contribution. The reason for the reduction in the amount that is able to be split, is that the fund trustee is required to retain the tax that would otherwise be payable in respect of Max’s tax deductible contribution.
If this strategy was adopted for each year that Sally remains at home, her superannuation balance will have grown by $31,875 over the three-year period.
More importantly, it is likely that both Max and Sally’s superannuation balances would have remained fairly similar, because they have continued to accumulate benefits at the same rate during the period that she is out of the work force.
Why are accumulated superannuation balances important?
The amount of a member’s accumulated superannuation entitlements, otherwise known as their total superannuation balance, is used to determine whether they will be able to take advantage of other opportunities to save for retirement through the superannuation system.
An example of this is with respect to the ability for a member to be able to carry forward the unused component of the concessional contribution cap.
If the amount of a contribution made by a member during a financial year is less than $25,000 then the unused component may be carried forward and added to the concessional contribution cap for the following financial year. A member is able to carry forward the unused component of the cap for a period of up to 5 years.
In order to be able to carry forward the unused cap, a member’s Total Superannuation Balance must be less than $500,000 as at the immediately preceding 30th of June. Note that in the financial year in which the member wishes to use the unused cap, his/her Total Superannuation Balance must also be less than $500,000 at the prior 30 June.
So by splitting part of Max’s contributions to Sally, we have ensured that not only will both parties accumulated benefits continue to grow at a reasonable rate, but also that they are both likely to have Total Superannuation Balances less than $500,000. Which means that they may both be able to take advantage of the ability to carry forward the unused proportion of their concessional contribution cap.
Please contact the author if you have any queries about this article or topic.
Mark Wilkinson is a Superannuation Partner in the Private Client Division with BDO in Sydney. Mark is one of the leading members of the BDO Superannuation team in Australia and has been providing superannuation and retirement planning advice for over 20 years. As a superannuation specialist, Mark provides strategic superannuation advice on how the State and Federal legislation impact on the areas of superannuation, retirement, estate and succession planning for clients as they build their wealth enroute to retirement. Mark knows how an SMSF structure can be used as an effective part of a business group, as an exit strategy, as a growth strategy, and how to undertake various property transactions including borrowing within the SMSF environment. Licensed to provide superannuation advice, he advises on SMSF establishment, contribution planning strategies, pension planning advice, estate planning and consulting regarding Superannuation Industry Supervision Act Compliance issues. Mark is a sought after National public speaker on superannuation and retirement, in-house trainer for large clients and accounting firms and an acknowledged industry specialist in the area of self-managed superannuation consulting. Contact Mark at [email protected] or connect via LinkedIn