Split super to boost age pension?
Anna Mirzoyan asks if the superannuation contribution splitting strategy can improve a member's future entitlement to the Age Pension.
The Superannuation Contributions splitting strategy was introduced in 2006 and provides a superannuation member with an opportunity to split a portion of the concessional contributions received within a financial year with their eligible spouse.
Strategically, this may provide an opportunity to relatively equalise the amount saved for retirement between the member and their spouse and help to:
- Maximise their combined low rate threshold;
- Fund insurance premiums for the non-working or low-income earning spouse;
- Access superannuation benefits earlier by splitting contributions to an older spouse; and
- Improve a member's entitlement to Centrelink benefits by splitting contributions to the younger spouse.
Can the strategy improve member's future entitlement to Age Pension?
In the Federal Budget 2015, the Government proposed significant changes to the assessment of the assets test that applies to the Age Pension entitlement from 1 January 2017.
The legislation was introduced to Parliament and received Royal Assent on 30 June 2015. Under the new arrangement, the Age Pension lower assets test thresholds and taper rate will increase from 1 January 2017.
As a result of these changes, the upper assets test threshold will reduce as explained in the table below.
The introduction of the new assets test thresholds will result in a reduced Age Pension entitlement or even loss of pension entitlement for wealthier retirees from 1 January 2017.
In situations where the superannuation member has a younger spouse, the implementation of the contributions splitting strategy beforehand may improve the superannuation member's entitlement to Social Security benefits when they reach their Age Pension qualifying age.
How would this be achieved? The superannuation interest held in an accumulation phase is exempt from Social Security assessment until the individual reaches their qualifying age for the Age Pension.
By gradually re-directing superannuation assets from the older spouse's superannuation account to the younger spouse's account using the contributions splitting strategy, financial planners will be able to improve the member's entitlement to the Age Pension until such time as the younger spouse reaches their qualifying age for the Age Pension.
The strategy is explained further in the case study section of this article.
What amount can be split?
Under the current superannuation legislation, the maximum amount that a member can split is broadly limited to the lesser of:
- Eighty-five per cent of the member's concessional contributions; and
- The concessional contributions cap for that financial year.
It should be noted that contribution splitting is subject to the rules of the fund and is limited to an accumulation fund and the accumulation component of a defined benefit fund.
Contributions made to the defined benefit component cannot be split as defined benefits are calculated according to a formula.
However, most defined benefit division members also have an accumulation account, and any concessional contributions made to the accumulation account can be split with the member's spouse, subject to fund rules.
What amounts cannot be split?
Amounts contributed to superannuation that cannot be split include:
- Benefits rolled over from another fund;
- Amounts that were previously rolled over as a contributions-splitting superannuation benefit;
- Superannuation lump sums paid from a foreign superannuation fund;
- Contributions that are not included in the assessable income of the fund, including non-concessional contributions, CGT exempt contributions, and Government co-contributions; and
- Contributions to a superannuation interest that are subject to a payment split or subject to a payment flag under the Family Law provisions.
For example, the contributions shown in the table below were made to member's superannuation account during the 2014/15 financial year.
Based on the contributions made in the 2014/15 financial year, the maximum amount that the member is able to split with their spouse is 85 per cent of the employer contributions and salary sacrificed amounts as follows:
85% x ($3,000 + $20,000) = $19,550
The member is able to request the split with their eligible spouse (up to $19,550) in the 2015/16 financial year.
When can contributions be split?
An important step in the contribution splitting process is that the contribution must first be made to the member's superannuation account. It cannot be directly paid to the spouse's superannuation account.
As mentioned previously, only after the end of the financial year in which the contribution is made can a member request a contribution split.
In the earlier example, concessional contributions made in the 2014/15 financial year into the member's superannuation account can only be split from 1 July 2015 until 30 June 2016.
However, an exception to this rule applies where the member is rolling over or cashing out their entire benefit. In this case, the split may occur at the time the rollover or the cash-out is occurring during the financial year, subject to the superannuation fund's rules.
Another important aspect is that a member is only able to make one payment split for each financial year.
This means the contribution will be first assessed against the member's contribution caps for the financial year the contribution is made.
When the contribution is split with the member's spouse in the following year, it will be rolled over as a contributions-splitting superannuation benefit and will not count towards the receiving spouse's contribution caps.
What are the tax components?
While the proportioning rule (ITAA 1997 307-125) is used to determine the tax-free and taxable components for an ordinary rollover or superannuation payment, a contributions-splitting superannuation benefit is treated differently.
The ITAA 1997 307-140 states a contributions-splitting superannuation benefit is to be 100 per cent taxable and the tax-free component is to be nil.
Who is an eligible spouse?
SISA 10 broadly defines a spouse to be a person (whether of the same sex or a different sex):
- With whom the member is legally married; or
- Who is in a relationship that is registered; or
- Who lives with the member on a genuine domestic basis in a relationship as a couple.
In addition, the member's spouse must:
- Be under their preservation age; or
- Have attained preservation age but under age 65 and has not met the ‘retirement' condition of release.
If a member's spouse is over their preservation age but under age 65, they must declare that they do not satisfy the ‘retirement' condition of release.
Case Study
John (62 years old) is a full-time employee, earning an annual salary of $150,000.
John had $250,000 invested in superannuation at the start of the 2014/15 financial year. His employer made superannuation guarantee contributions of $14,250 ($150,000 at 9.5 per cent) in the 2014/15 financial year.
John has also been salary sacrificing a regular amount of $1,700 a month or $20,400 a year to his superannuation account.
John is married to Fiona (51 years of age), who is working part-time, earning an annual salary of $40,000.
Fiona had $70,000 held in her superannuation account at the start of the 2014/15 financial year. Fiona's employer made superannuation guarantee contributions of $3,800 ($40,000 at 9.5 per cent) in the 2014/15 financial year.
John and Fiona are planning to retire in five years. Upon retirement, John will apply for the Age Pension, which will be supplemented by monthly pension drawdowns from John's superannuation income stream.
If John and Fiona continue with their current arrangements and make contributions to superannuation at the same level, the balance of John's superannuation account is expected to reach about $511,000 and the balance of Fiona's superannuation is expected to reach about $114,000 by the end of year five as detailed in the table below.
If, however, John implemented the superannuation contributions splitting strategy in each financial year for the next five years, he could split up to 85 per cent of the concessional contributions made in the previous financial year with Fiona.
Based on the same contribution amounts, by implementing the contributions splitting strategy each year, John will be able to reduce his superannuation balance from $511,000 to $344,000 by the end of the year five as detailed in the table below.
This will result in John being entitled to a higher amount of Age Pension when he retires (see table below).
When John applies for the Age Pension upon retirement, Fiona's superannuation benefits will be exempt from Social Security assessment and will continue to be exempt until Fiona reaches her qualifying age for the Age Pension (age 67).
Summary
By implementing the superannuation contribution splitting strategy, John has a greater opportunity to maximise the amount of concessional contributions to superannuation while working.
More importantly, John has a greater opportunity to improve his entitlement to Social Security benefits when he retires.
Although the implementation of superannuation contributions strategy may not be appropriate for all and may not provide additional Social Security benefits to everyone, there may be situations where planning ahead may increase the clients entitlement to Social Security benefits for a few years.
Anna Mirzoyan is the technical services consultant at Fiducian Financial Services.
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