Making sense of the contributions maze

Superannuation can be a balancing act for a couple where one partner may have a greater balance than their spouse. So how can someone get even – I mean that in a nice way. It needs planning and an understanding of the contribution and withdrawal rules to work out the best path in the superannuation maze. Let’s look at what is possible, but as usual it always depends on the circumstances.

Splitting concessional contributions

For many one of the best ways of smoothing out balances in the fund during someone’s working life is splitting concessional contributions to their spouse.

What contributions can be split?

Concessional contributions include employer contributions, salary sacrifice and personal contributions where a tax deduction has been claimed. However, they can include any amounts which are counted against a person’s concessional contributions cap such as transfers from reserves.

How much can be split?

It is possible to split up to the lesser of 85% of the person’s concessional contributions or up to the person’s concessional contributions cap. The standard concessional contributions cap is $25,000 p.a. but since 1 July 2018 it is possible to increase the cap by bringing forward any unused concessional contribution cap amounts.

For the bring forward rule to apply the person must have a total super balance on 30 June of the previous financial year of no more than $500,000. The spouse who receives the split concessional contributions is not subject to any total super balance cap and can have the split concessional contributions added to their super balance.

When can the split take place?

Most contribution splits take place in the year after the concessional contributions are made so concessional contributions made in this financial year, the 2020/21 financial year would usually be made in the 2021/22 financial year.

A word of warning, if the entire benefit is being rolled over, transferred, paid as a lump sum or a combination then any split must take place prior to the benefit being paid from the fund. This can occur in the year the concessional contributions have been made to the fund rather than in the year after.

Are there any limits on splitting to the spouse?

Concessional contributions can be split providing the spouse is under preservation age, currently age 58, or between preservation age and age 65 if the spouse hasn’t retired. After the spouse reaches 65, they cannot receive split concessional contributions.

To allow the contribution split to take place an election is required to be made by the splitting spouse indicating the amount to be split to their partner.

Case study

The following case study shows how spouse contribution splitting can take place:

Grant who is 58 and works part-time has a lower super balance than his spouse, Annette, who is age 55 and works full-time.

Annette relies on her employer to make superannuation guarantee contributions. For the 2018/19 financial year her employer contributed $15,000 to her SMSF as concessional contributions. This meant that $10,000 ($25,000 less $15,000) which is her concessional cap shortfall could be brought forward for up to five years and included in her concessional contributions cap. In the 2019/20 financial year Annette’s employer contributed $16,000 as superannuation guarantee contributions.

Annette decided to make the maximum top up concessional contribution for the 2019/20 financial year which would be $19,000. That amount consists of the bring forward amount of $10,000 from the 2018/19 financial year as well as the $9,000 which is her concessional contribution cap shortfall from the 2019/20 financial year. Annette makes a personal contribution of $19,000 which she claims as a tax deduction.

In the 2020/21 financial year Annette decides to split the concessional contributions made personally and by employer during the 2019/20 financial year to Grant. The combined concessional contributions for Annette made during the 2019/20 financial year were $35,000. It is possible for her to split up to 85% of $35,000 to Grant’s superannuation balance which is $29,750. Annette will need to complete a Superannuation contributions splitting application before 30 June 2021 to be able to split her concessional contributions to Grant.

The transfer of Annette’s concessional contributions, net of contributions tax, to Grant will increase his balance by $29,750 and help even out both their balances in the fund.

Spouse contributions

Spouse contributions have been around for many years and allow a member of a couple to make non-concessional contributions on behalf of their spouse. If the spouse is under age 67 non-concessional contributions can be made without the spouse meeting an annual work test of 40 hours in 30 consecutive days. However, once the spouse reaches age 67, they must meet the work test in any financial year in which the spouse contributions are to be made. Once the spouse reaches age 75 there is no further opportunity for spouse contributions to be made.

Limit on spouse non-concessional contributions

The limit on the amount of spouse contributions depends on the spouse’s total superannuation balance on 30 June in the previous financial year. For a spouse who is older than age 65 it is possible for non-concessional contributions of up to $100,000 to be made if their total super balance on 30 June in the previous year is less than $1.6 million.

A spouse younger than 65 may have access to a bring forward non-concessional contributions rule which can allow up to 3 years non-concessional contributions ($300,000) at any time during a set three year period. This is available if the spouse’s total super balance as at 30 June in the previous year is less than $1.4 million. If the spouse’s total super balance is between $1.4 million and $1.5 million it is possible to bring forward two year’s non-concessional contributions ($200,000) over a set two year period. If the spouse’s total super balance is between $1.5 million and $1.6 million then the maximum non-concessional contribution for the financial year is $100,000. Once a spouse’s total super balance exceeds $1.6 million no further non-concessional contributions are permitted.

In addition to the contributing spouse being able to make non-concessional contributions for their spouse it is possible for them to obtain a tax offset of up to $540 if the spouse is considered a low income earner. For the first $3,000 of a non-concessional contribution made by the contributing spouse a 17% tax offset applies if their spouse has an adjusted taxable income of less than $37,000. The amount of the tax offset reduces for adjusted taxable incomes between $37,000 and $40,000 when it cuts out altogether.

Case study

Here is a case study on how the spouse contribution works:

Ryan has a high superannuation balance and his partner Frances has been raising the family for some years. Her super balance of $300,000 is a long way behind Ryan’s which is close to $1 million and needs a bit of a boost. Frances has had a part-time job and usually earns about $20,000 to $30,000 each year.

Ryan decides to use a combination of splitting his concessional contributions of $25,000 to Frances and making spouse contributions for her. As Ryan can split up to 85% of his concessional contributions to Frances it will build her balance by $21,250 as well as the non-concessional spouse contributions of $150,000 he has made for her. After these contributions are made to the fund it will build up Frances balance in the fund to $470,250.

Another possible strategy could be for Frances to make a non-concessional contribution to the fund which would be eligible for the co-contribution and could increase her super balance by another $500.

Using the recontributions strategy

The recontributions strategy allows a person who has met a condition of release such as retirement after preservation age or they are at least 65 to withdraw a benefit from the fund. If it is possible for a contribution to be made to the fund for the member’s spouse or for the spouse to make the contribution themselves then they may be able to smooth both member’s balances.

Case study

Here is a case study to show how the recontribution strategy could work for a couple:

Marcus, who is 62, has just retired and has a balance in his super fund of $1.7 million. His partner, Georgie, is age 58 and has a balance in her fund of $1 million. Marcus decides to withdraw $300,000 and make a non-concessional spouse contribution for Georgie. This will build Georgie’s balance in the fund to $1.3 million and reduce Marcus’ superannuation balance to $1.4 million. Because of the reduction in Marcus’ super balance, in future, it may provide an opportunity to make non-concessional contributions to the fund. This would not have been possible if Marcus’ super balance remained above $1.6 million.

Super smoothing

There are many ways in which a couple can smooth out their superannuation balances to open up contribution opportunities and access tax concessions. In this article the benefits of super contributions splitting, spouse contributions and the use of the recontribution strategy are demonstrated. But there are many other strategies that can be used to get even, of course, I mean that in the nicest possible way.