(03) 9020 2905PORTFOLIO POINT: Don’t take the chance this new legislation will fail to pass. You need to start splitting super contributions now.
There has been a relatively small band of superannuation experts who, in recent years, have continued to push heavily a very unfashionable strategy.
The strategy concerned spouse super splitting. It was a strategy that had some real value when reasonable benefit limits (RBLs) were such a serious handbrake on growing your super.
But then RBLs were abolished. And pension funds and super pensions were both completely tax free. The strategy seemed to have become completely irrelevant and pointless.
However, those advisers argued that, as a risk-mitigant against potential future government regulatory changes (wouldn’t you know it), it has always had a value.
And who’s laughing now? (And any of their larger clients who followed their adviser’s recommendation owes him a special bottle of something.)
The most obvious strategy that has come out of last month’s changes to the super rules is going to be the advantage of having two people to share a superannuation nestegg.
Even though there is no certainty that this government will get its proposed changes to superannuation rules through parliament, it would be silly to risk it.
If you are making contributions this financial year (before 30 June), then make sure you put in due consideration into whose name the contribution is made.
Even up the score
You simply have to. It could be a seriously costly annual tax error to have uneven super balances between a husband and a wife from now on.
While the government’s assertion that the new pension earning tax will only affect those people with more than $2 million in super is codswallop (see my column on 10 April 2013 for an explanation), let’s use that as a base for simplicity.
To take an extreme, let’s take a SMSF that has $3.5m in super. Of that, $3.4 million belongs to Member A and $100,000 belongs to Member B. Member A is likely to have pay $10,500 in income tax on his pension.
(The new super pension tax rules state that pension funds earning more than $100,000 a year will have to pay 15% income tax on the amount above $100,000. For a broader explanation of how this works, see the 10 April column.)
But if Member A and Member B both have balances of $1.75m, then no tax is paid.
Tackling non-concessional contributions (NCCs)
How do you even out contributions? Some of it is relatively easy. Some of it takes a little work.
Clearly, voluntary contributions, such as non-concessional contributions (NCCs) is the easiest choice to make. If you were going to make some sort of NCC this financial year, then you should take into consideration whether you should make that NCC to the person with the lower balance, or perhaps a portion of that contribution.
In the main, this is after-tax cash being deposited into a fund. You get to choose into whose account it goes.
You need to be aware of the $150,000 NCC limits each year, the three-year pull-forward rule and the eligibility rules for making those contributions. See previous columns for more information.
Concessional contributions (CCs)
For many, this is going to be a little tricker. But it’s also where you can rewrite a little history.
(This is assuming that the existing concessional contribution limit is $25,000 applies to everyone for this year. Although older members who had $50,000 CC limits for FY12 might be able to do the same thing with larger contributions if they’re quick and can get the paperwork done before the financial year ends.)
The rules surrounding spouse super splitting are, roughly, that you can split up to the amount of the CC made for the previous financial year (say 30 June 2012), if done before the end of the following financial year (30 June 2013), less contributions tax.
That is, if the husband (for example) was the only one eligible to receive or make CCs for FY12, then he could, prior to 30 June 2013, do a super split with his wife for $22,500 ($25,000 less 15% contributions tax).
For those who have particularly lopsided super balances right now, this is a strategy you might want to consider IMMEDIATELY for FY12 contributions, while you still have the chance.
And as alluded to above, if you had a $50,000 CC limit for FY12, then you could potentially split with your partner now, then all the better.
Taking it to the limit
For people taking contributions (NCC and CC) to the edge each year, then it’s really important that you sit down with an adviser and start planning your contributions properly.
There are some things you should potentially do immediately, plus other things that you might want to be doing from 1 July, particularly those who might be able to take advantage of a CC limit of, say, $35,000 for the next couple of years.
Don’t worry about the family law tax consequences
Understand that I’m not a lawyer. But since the rules were changed earlier this century, superannuation has largely become a divisible asset as far as relationship breakdowns go.
It used to be the case that the (generally) husband could have a $2 million super account that was completely untouchable in the event of a separation. That’s no longer the case. Superannuation is counted as “just another asset” when it comes to splitting up the financial pie that comes at the unpleasant end of a relationship.
So, if you’re the person who has the bigger balance (say $2 million versus $100,000), don’t be under the false impression that splitting future super contributions will work against you. It won’t. Your super is your partner’s super, in the eyes of the law, anyway.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au