The unique Australian tax advantages of superannuation are well known. And a key component of the tax benefits is dependent on the age of the person retiring and the amount of money a person retires on.
This focus on the single member of a superannuation fund directly compares to how a family in business will operate. A commercially minded family will look at the overall after-tax position for a family. And clever tax structuring for a family can make a difference because superannuation and tax law allows for a couple to “split” superannuation contributions from one member to their spouse.
What is a “splittable contribution”
Only some type of monies injected into a superannuation fund can be split to a spouse. These are referred to as “taxed splittable contributions” and means a superannuation contribution[1] including an employer super contribution, a salary sacrificed contribution from an employer and a personal concessional contribution made by a member.
How does a super split affect my contribution limits
If you exceed a set amount of taxable contributions each year the government will apply an excess concessional contributions tax. Tax law currently allows a person to claim $27,500[2] in tax deductions for a member and not incur excess concessional contributions tax.
If you choose to split a superannuation contribution to your spouse the decision to split does not affect your concessional contribution limit. That is, each member still retains the $27,500 concessional contribution limit.
Why should I split a super contribution?
Tax law gives tax concessions to people depending on their age and the amount of their superannuation fund.
A member is getting to pension age
Some families have a wide age gap between spouses. And if one spouse has the tax opportunity to generate investment income in their super fund free of tax – a super splitting tax strategy gives the family the opportunity of holding more of their superannuation monies in a tax free environment.
A members super balance is getting high
Tax law currently restricts the amount of a tax free pension a person can enjoy. And if one member of the family is getting close to their tax free pension threshold then an effective tax strategy might be to split superannuation contributions to their spouse with a lower balance.
As a couple this could then ensure that the total money sitting inside a superannuation fund is enjoying a lower overall tax rate.
Forward tax strategies might benefit
If a person has a lower superannuation fund balance tax law allows for additional superannuation contributions to “claw back” prior year unused super contributions. Potentially a super splitting strategy keeping one member under the lower threshold strategy might give them an opportunity later on to clawback more of their unused concessional contributions.
You might be considering a lump sum payment
If you are under 60 and you draw money from your super fund you might incur tax on the withdrawal. Any amounts currently over $205k taken from a members super fund as a lump sum payment incur tax at the rate of 22%.
A potential superannuation splitting strategy allows for a couple to access the combined low rate threshold of $410k.
How to split superannuation contributions
The Australian Taxation Office has a designated tax form that gives the tax instructions to your super fund to split the contributions. It is called (helpfully) a NAT 15237. If you complete this form and give it to your superannuation trustee. You cannot ask your super fund trustee to split contributions before the beginning of last financial year.
Some superannuation funds will not allow you to split contributions as a policy decision. So always check with the super fund trustee.
How much can you split
The maximum contribution you can split is 85%
How can you split super contributions?
You can only split your super contributions to your spouse if your spouse is under the preservation age or under 65 and not retired.
Anything else?
If you are splitting super contributions to your spouse you should engage with a licensed investment advisor or insurance broker. You spouse’s superannuation fund might have a different investment mix to your superannuation fund or the lack of super contributions might mean that your super fund does not have enough cash to pay life insurance premiums.
Getting correct tax advice and correct investment advice is critical for getting the best after tax outcome for a family.
Take home
The tax strategies for commercially minded families in business are significant. If you are strategically considering the after tax wealth of your family: engaging in a considered tax strategy, coupled with smart investment choices can make a long term outcome.
At Westcourt we are focused on giving independent, impartial and unbiased tax advice. If your investment journey is focused on your business first, property investments or passive investment holdings – we can strategically help and collaborate with you and your team to get you the best-case outcome: after tax.
[1] Subdivision 295-C Income Tax Assessment Act 1997 (ITAA 97) and s274 ITAA 97
[1] S291-15 ITAA 1997
