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SUMMARY: Five strategies for couples to even up super balances this year, if they can act quickly.
Fatigue has set in. And some barely repressable anger. Treasurer Scott Morrison’s Budget on May 9 had better not have major super changes in it.
The changes that got through parliament late last year have required full-time finessing from public servants. The final rules are still being worked on, with explanations and qualifications coming out from the ATO on a regular basis.
But there is enough certainty about most of the rules now to know that there are, simply, things that must be done before 30 June. For almost everyone.
Couples are the group with the most to win from playing the current rules in the lead-up to 30 June, 2017.
There is not a lot that single people can do to share around their super fund balance, if they currently exceed the $1.6m transfer balance cap. Apart from give it away. Which is not a great strategy.
But there are plenty of ways that couples can do it.
First, it is reasonably common for couples to have uneven super balances. For the past decade, all super in pension phase has been tax free. It hasn’t mattered if one spouse had a $5m super fund and the other had zip. The whole lot, in a pension fund, earned money tax free and came out as income tax free (if the recipient was over 60). The couple earned a wonderful tax-free pension. And it didn’t matter that it was technically owned by just one person.
That’s changed. And now it has become imperative from a tax perspective to even out super balances as much as possible.
Having one spouse with a $3m balance and the other with a $200,000 is going to be very costly. The excess above $1.6m (for the member with $3m) is going to have to go back to accumulation, where it will be taxed at 15% on income and, effectively, 10% on capital gainst (taking into account the one-third discount on investments held for longer than a year).
Unless some good strategies are put in place … for those who are eligible to use them.
Spouse splitting of contributions
The first and most common strategy that will see a significant resurgence in the coming years is the use of the “spouse splitting” strategies.
This is where up to 85% of the concessional contributions (CCs) made for one spouse are transferred to the other spouse.
That is, if you are the higher-earning spouse, you can effectively send all of the CCs that were made to your account (CCs include Superannuation Guarantee payments, salary sacrifice and eligible deductible contributions) to your spouse.
It is possible, for those who act now, that they could move up to $29,750 ($35,000 less 15%) from one spouse’s account to another, if the giving spouse is over 50.
For spouses under 50, with a CC limit of $30,000 for FY17, that they could move $25,500 to their spouse ($30,000 less 15%).
This will also be possible next financial year, but will be based on the lower amount of a maximum of $21,250 (being $25,000 less 15% contributions tax), as $25,000 will be the maximum concessional contribution for all next financial year.
There are some technical restrictions around this, which include that it must be lodged with the fund within the following financial year and the receiving spouse must be under 65, or between preservation age and 65 and NOT retired.
Speak to an adviser before proceeding with this. But this will become a very important strategy for thousands of couples in the future.
Withdrawal and recontribution
Spouse splitting will be most effective where done over a working lifetime. But if you want a big bang for your buck, then a variation on a “withdrawal and recontribution” strategy might work for you.
This would involve taking out money from the spouse with the higher super balance’s account and putting it back in to the lower-super spouse’s account, as a non-concessional contribution.
Again, there are plenty of rules around this.
Here’s a scenario where it could work well. Both members of a couple are 60 years old. One has a large balance ($2.5m), while the other has a small balance ($500k). They have retired.
It could work that up to $540,000 could be withdrawn from the larger account and then put into the smaller account, before 30 June 2017, as a $180,000 NCC for FY17, then another $360,000 to use the three-year pull-forward rules for FY18 and FY19 for NCCs.
This would reduce one super fund to $1.96m and increase the smaller one to $1.04m. The larger fund would still have some tax to pay, after 1 July, on the $360,000 ($1.96m less $1.6m) that is in excess of the $1.6m limit that was moved back from pension to super.
But that could still be a tax saving of more than $4000 a year (based on $540,000 times an income earning rate of 5%, times 15% tax).
Normally, a withdrawal and recontribution strategy is done for one member and is about changing the taxable nature of the fund for that member, usually designed to potentially save tax for death benefit beneficiaries.
But doing it across a couple will work even better to save a guaranteed sum in tax each year.
Straight contributions to lower-super spouses
Far more straight forward.
If one spouse has a lower super balance and you have money to put in to super, put it in to that account. For example, you’ve sold an investment property and have $300,000 to put into super.
If one member has a drastically lower super balance than the other, put that money in to their account.
Salary sacrifice to the max this year
If you have savings sitting aside that you could use to fund lifestyle expenses for a few months … consider ramping up your super contributions to the maximum for this year.
(Again, those limits are $35,000 for the over-50s and $30,000 for the under-50s.)
If you have savings that you can live on between now and 30 June, you have a short window where you could salary sacrifice, for both of you, to get to the maximum limits for this financial year. After that, you might also be able to combine it with the spouse splitting rule above.
This will make the most sense, generally, where members of a couple are earning north of $60,000 and less than $250,000.
Spouse contribution rebate
This one doesn’t kick in until next year. But it’s worth mentioning again now, because it’s a goodie.
From 1 July, the threshold for the spouse contribution rebate will increase from $10,800 to $37,000. That is, you will be able to make a $3000 contribution to your low-earning spouse’s account and receive an 18% rebate (therefore worth up to $540 a year).
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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 managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.