Question: I am 41 years old and my partner is 56 years old. We have a very big mortgage as we are both the casualties of wealth destroying divorces and single parenthood! Thus we intend to pay off our mortgage before putting more into our superannuation. Can I transfer part of my superannuation to his fund now as I have much more working life ahead of me, so that he can at least be getting the benefit of compounding? I know this can be done in divorce settlements so I assumed may be superannuation assets can be shifted around within a marriage as well?
A: Couples are only permitted to split super benefits if they separate or divorce, but married and de facto couples can split certain types of super contributions. A spouse can also claim a small tax rebate when making super contributions on behalf of a low-income spouse.
Before I answer your question in more detail, I will briefly outline the contributions caps that you refer to in your question.
Australians wanting to make additional super contributions to their super accounts can make two types of super contributions – concessional and non-concessional.
Australians can make concessional (before-tax) contributions up to $25,000 (for the 2012/2013 year). Before July 2012, anyone aged 50 or over could make up to $50,000 in concessional contributions each financial year but this higher contributions cap for over-50s has been removed for at least the next two years, and possibly forever (depending on whether the Government introduces a higher cap for some over-50s from July 2014).
Concessional contributions include compulsory employer (Superannuation Guarantee contributions), additional employer contributions, additional contributions made under a salary sacrifice arrangement or tax-deductible super contributions.
Individuals can also make non-concessional (after-tax) contributions up to $150,000 a year (for the 2012/2013 year), while individuals under the age of 65 can ‘bring forward’ two years’ worth of non-concessional contributions. What this means is that an individual under the age of 65 could make after-tax contributions of up to $450,000 in one year, representing his or her limit for the next three years.
I explain the contribution rules in more detail in the following SuperGuide.com.au articles:
- Super concessional contributions: 2012/2013 survival guide
- Your 2012/2013 guide to non-concessional (after-tax) contributions
An individual cannot split non-concessional contributions with his or her spouse, but an individual can split concessional (before-tax) contributions with a spouse provided that the super fund the individual belongs to permits contribution splitting. The practical effect of such a split is that 85% of the contribution reaches the spouse account because super funds deduct the 15% contributions tax before splitting.
Splitting super contributions can be popular in the instance where a higher-income earning spouse salary sacrifices contributions (or makes tax-deductible contributions), and then splits the contributions with the lower-income earning spouse. The higher-income spouse gets the tax break and the other spouse gets a larger super benefit.
Typically there are two main advantages with the contribution splitting strategy:
- If you’re planning to retire under the age of 60 and take all or part of the super benefit as a lump sum, then each member of a couple can access their own tax-free threshold for lump sums (relating to the taxable component) of $175,000 (for the 2012/2013 year).
- If your partner is a few years older than you, then by splitting super contributions with an older spouse, they can access super benefits at an earlier stage. The older partner also reaches 60 first, which means tax-free super benefits at an earlier time.
An individual can make concessional (before-tax) contributions to a super fund, including a self-managed super fund, and arrange to split those contributions with a spouse.
Remember: If an individual plans to split super contributions with a spouse, then the receiving spouse must be under the age of 65. The individual must complete a special form stating they intend to split super contributions.
Note: You can only split contributions made in the previous year. For example, contributions made during the 2011/2012 year can only be split during the 2012/2013 year, and contributions made during the 2012/2013 year can only be split during the 2013/2014 year.
Warning: If you plan to claim a tax deduction for super contributions, then that notice to claim a deduction must be lodged before the super splitting declaration.
If you’re considering taking advantage of the super splitting strategy I suggest you get some tax advice, and potentially retirement planning advice, to ensure you fully understand the financial implications of such a strategy.
Generally, spouse contributions are available where one of the spouses has part-time paid work or no paid work. If an individual has assessable income of less than $13,800, then his or her spouse can make contributions on behalf of the low-income spouse and claim a tax offset. If an individual receives $10,800 or less in assessable income, then his or her spouse can access the maximum tax offset of $540, provided an after-tax (non-concessional) contribution of at least $3000 is made to the low-income spouse’s super account. The tax offset is progressively reduced until the tax offset reaches zero for spouses who earn $13,800 or more in assessable income in a year. Note that the income thresholds have not changed since the introduction of the spouse offset about 10 years ago.
Note: An individual who has reached preservation age (currently 55) can start a superannuation pension before retiring. This special type of pension is known as a transition-to-retirement-pension (TRIP), and allows older Australians to plan, and manage, retirement in a more flexible way. Many individuals use TRIPs to maximise the tax benefits associated with super, while boosting super accounts. I explain TRIPs in more detail in the article Starting a TRIP takes planning.