5 strategies to help fix your total super balance problem

In general terms, your TSB is calculated by adding the:

• Value of your accumulation phase super interests
• Value of your retirement phase super interests
• Amount of your rollover super benefits not already included in your accumulation or retirement phase balances (rollovers in transit between super funds on 30 June)
• Outstanding balance of any SMSF or small APRA fund limited recourse borrowing arrangement entered into from 1 July 2018 (in certain circumstances)

… less any personal injury or structured settlement contributions paid into your super accounts.

5 strategies to manage your TSB

If your TSB is getting high, there are strategies to help lower it that may be worth considering.

Potentially, these strategies may allow you to continue making non-concessional contributions into your super account without paying additional tax, continue using carry-forward concessional contributions for longer, or maximise the amount you and your spouse can transfer into tax-free retirement income streams by ensuring you both make the most of the available transfer balance cap.

Strategy 1: Split contributions with your spouse

Contribution splitting is a simple strategy to reduce your TSB and boost your partner’s retirement savings at the same time.

To avoid problems if one member of a couple has a high TSB, the partner with the highest amount in super can ‘split’ some of his or her super contributions with their partner.

This can be a simple way to reduce one partner’s TSB and balance out the amounts you both hold in super.

Under the splitting rules, each financial year you can allocate the lesser of:

• 85% of the taxed concessional (before-tax) contributions made into your account during a financial year, or
• Your concessional contributions cap for the financial year (which may be higher than the standard annual cap if you are eligible to use carry-forward concessional contributions).

If you are a member of an untaxed public sector scheme you may also be eligible to transfer the lesser of 100% of your untaxed contributions and the annual concessional cap to your spouse. Not all public sector schemes are able to offer contribution splitting.

Strategy 2: Withdraw money from super

Applying for withdrawal of a pension or lump sum amount before 30 June can also be a way to reduce your TSB, allowing you to make additional super contributions affected by the TSB eligibility rules (see above).

If you have met a relevant condition of release (such as reaching 60 and leaving a job or turning 65), you are eligible to receive a payment from your super fund.

Starting an account-based pension and receiving pension payments, taking a lump sum from an account-based pension, or receiving a lump sum from your accumulation account, all automatically reduce your TSB.

Strategy 3: Withdraw money from your super to contribute to your spouse’s account

If you meet a condition of release and your spouse has a smaller super balance, it may be worthwhile withdrawing some of your super and recontributing it into your spouse’s super account.

Not only will this help equalise your individual account balances, but it will also reduce the TSB of the partner with the higher account balance.

Withdrawals are tax free when you are aged 60 or more unless taken from an untaxed public sector fund.

Your spouse must be eligible to contribute to their super account and must not have exceeded their non-concessional (after-tax) contributions cap.

Strategy 4: Adopt tax-effective accounting for your SMSF

Tax-effective accounting is a way of reflecting the true balance of a member’s super interest and is commonly used by large super funds.

SMSFs, however, usually only recognise the tax liabilities associated with unrealised capital gains when they are incurred. This means a member’s current account balance is usually based on the market value of the fund’s assets, not their after-tax value.

Although the ATO uses the member account balance listed in your SMSF’s annual return to calculate your TSB, this is not identical to the actual value of your super interests. Your actual withdrawal benefit amount is broadly the net realisable value of your interests after tax and possible future costs associated with realising assets to pay out your super interests.

If your SMSF introduces tax-effective accounting, the fund will start recognising its future tax liabilities and costs each year. By using this approach, the SMSF’s asset values will not overstate their likely after-tax position.

This potentially reduces the value of the fund’s assets – and the super interests of individual members. Using this accounting approach may make individual SMSF members eligible to make additional super contributions, as their TSB will be lower.

Strategy 5: Pay arm’s-length expenses in your SMSF

Paying expenses can also reduce the total value of an SMSF and the account balances of its members – in turn reducing their individual TSBs.

Common SMSF expenses include the SMSF supervisory levy, audit and actuarial fees, operating expenses (such as management and administration fees), investment-related expenses (such as brokerage and bank fees), and accounting fees to prepare and lodge the fund’s annual return.

For this strategy to be appropriate, any expenses paid by the SMSF must comply with the sole purpose test and must not provide financial assistance to members or relatives.

The expenses also need to meet the arm’s-length rules and be distributed in a fair and reasonable manner between all the SMSF’s members.

Too much in super? What else can you do?

If your TSB exceeds the eligibility thresholds allowing you to keep making non-concessional super contributions, then it might be time to consider some of the other tax-effective investment structures on offer outside super.

Remember you can also still make concessional contributions up to the annual cap every financial year, regardless of your TSB.

Strategies to discuss with your financial adviser could include:

1. Investment bonds

Investment bonds offer valuable tax advantages for higher-income earners.

The investment earnings on these bonds are taxed at a maximum rate of 30%, which can be a lower tax rate than the one normally paid by most high-income earners. 

As an additional sweetener, the investment earnings from investment bonds are not included in your taxable income as the tax is paid within the bond structure.

2. Family trusts

Although they are complex, many people find family trusts a tax-effective vehicle for investing.

These structures offer many tax benefits and allow capital gains to be distributed among members of the trust.

As the tax rules in this area are being tightened, it’s important to discuss the pros and cons of a family trust with a registered tax adviser before seeking to set up any trust structures.