Splitting Contributions

Provided by Euroz Securities

Given the changes that take effect from July 1st, the equalisation of superannuation benefits between members of a couple can be a highly effective strategy to enhance the tax effectiveness of your superannuation and/or to provide additional contribution flexibility in the future. The higher contribution limits that apply this year mean that there is greater scope to act before June 30 2017.

Pensions

From July 1st there will be a limit of $1.6m which can be held in a tax free pension. Amounts in excess of this limit need to be transferred back to the accumulation phase of the fund where tax rates of up to 15% apply.  It is however important to understand that these limits apply on a member by member basis and as a result there may be opportunities to equalise the amounts between a couple to maximise the use of the limits.

Let’s explain by way of example:

Tom (60) and Christine (61) have $2.1m in their SMSF. The entire benefit is attributable to Tom and is in pension phase.

Under the changes, after July 1 Tom will be required to transition the excess $500,000 above the $1.6m limit back into accumulation phase. Once there, any earnings on that $500,000 will be taxable at up to 15%.

A potential strategy would be for Tom to elect to withdraw $540,000 via a pension payment and then contribute this into Christine’s member balance. As a result, Tom would have $1,560,000 in his fund while Christine would have $540,000 in her account. Provided Christine commences a pension and as they both are under the $1,600,000 limit, the entire balance will remain in the tax free pension environment.

This strategy only works as a result of Christine’s current ability to make up to $540,000 of after tax contributions to her fund using what’s called the “Bring Forward Provision”. This is available where the person making the contribution is under age 65 and hasn’t made personal contributions in excess of $180,000 in the last two years.

From July however this ability will be significantly diminished due to reductions in the contribution limits which will see the Bring Forward Provision restricted to $300,000.

Increasing future contribution flexibility

The strategy of seeking to equalise superannuation benefits between members of a couple can also be effective in increasing future flexibility to make after tax contributions.  From July, those with more than $1,600,000 in their super account will be unable to make any future after tax contributions. As a result where one member of a couple has a disproportionate amount of the couple’s total superannuation assets, there may be the opportunity to equalise benefits to improve the couple’s ability to contribute in the future.

Let’s consider John and Jane who have an SMSF worth $1.5m of which the full balance is in Jane’s name. They may sell an investment property they hold in their personal names in 3 to 4 years’ time and would like to maximise contributions to super at that stage.

A potential strategy this year would be for Jane to withdraw $540,000 from her fund now and give it to John to make an after-tax contribution to his superannuation balance prior to June 30 utilising the Bring Forward Provision mentioned above.  By doing this Jane’s balance reduces to $960,000 and John’s becomes $540,000 and they are both comfortably under the limit of $1,600,000 allowing them to make additional contributions of up to $300,000 each in future years. Had they not adjusted their balances now they’d be unable to continue to contribute in the future when they sell that property.

For younger readers, the ability to equalise member benefits can be done via splitting your standard employer or tax deductible contributions. It is possible to have up to 85% of your employer’s contributions split to your spouse therefore allowing the level of ongoing contributions to be equalised. This can be particularly effective where a member of a couple ceases work for a period of time such as to be the primary carer for children.

Disclaimer

This publication has been compiled by Euroz Securities Limited ABN 23 089 314 983 AFSL 243302. This publication is current as at time of preparation. Past performance is not a reliable indicator of future performance. Any outlooks in this publication are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based are reasonable, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from our outlooks. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This publication may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. Euroz is not responsible for such material. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) neither Euroz, nor any member of the Euroz group of companies or its authorised representatives, is in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from your adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances. More information? For further information on any issue discussed in this publication, or on any financial matter, please contact your financial adviser.