Keeping nest eggs in two baskets

There are many different ways to skin an RBL cat. Kevin Smith looks at some of these opportunities including the issue of income split-ting via spouse contributions.

There are many different ways to skin an RBL cat. Kevin Smith looks at some of these opportunities including the issue of income split-ting via spouse contributions.

Many couples have all of their superannuation in the husband's ac-count with little or no superannuation in the wife's account. The husband may be funded up to his reasonable benefit limit (RBL) and have access to part or all of his superannuation. This may be be-cause he has been made redundant or has monies that have become unre-stricted non-preserved because he has left an employer.

Let's consider a couple called John and Margaret. John has just re-ceived a large redundancy payment at age 55. This means that he is fully funded up to his RBL. However, he does not want to retire un-til age 65 and is looking for another job.

The issue is that John's superannuation is likely to have more than doubled by the time he retires at 65. However, his RBL is only in-dexed by average weekly ordinary time earnings and hence there will most likely be an excess benefit.

So how do we manage this excess benefit? There are many different ways to skin an RBL cat and a planner should consider all of the op-tions before making a recommendation to their client.

Firstly, and most importantly, the issue of a transitional RBL should be considered. These were the grandfathering provisions released on 30 June 1994 to lock in your existing RBL if it were greater than the new flat rate RBLs of $400,000 (lump sum) or $800,000 (pension). Note that the current flat rates are $485,692 (lump sum) and $971,382 (pension).

Many people missed the opportunity to apply for a transitional RBL even though the deadline was extended up to 4 April 1997. In general, the RBL unit will only accept a late application on three grounds. Either the applicant was overseas, ill or thirdly, and least likely now, awaiting information (from the superannuation fund).

However the line should not be drawn here. If you think that your client would have been entitled to a transitional RBL, then it is worth taking the case up with the Australian Tax Office (ATO).

The ATO will consider each case on its merits and has been known to accept late applications. In one case, a client thought they had a transitional RBL, however it was just a previous notification as to what their RBL was under the old rules. The ATO allowed a late appli-cation in this case.

Another client had been incorrectly told by their previous adviser that their transitional RBL would be below the new flat rates and hence there was no need to apply for a transitional RBL. The new ad-viser was able to make a late application based on the fact that the client had been poorly advised.

Going back to our case study, John's adviser did consider the possi-bility of applying for a transitional RBL back in late 1994. However, after doing the calculations, he discovered that it would not have been higher than the new flat rate RBL of $400,000.

But if you cannot get a transitional RBL for your client, do not de-spair... There are many ways to skin an RBL cat.

Some of the strategies that you may consider are the use of a non-rebatable allocated pension, the use of complying pensions or possi-bly other self managed super fund strategies.

The use of non-rebatable allocated pensions has been particularly popular, especially where the client has potentially only a moderate excess benefit. This strategy defers the payment of excess benefit tax onto the end of the pension. It can also be used with some estate planning techniques to defer onto the life of the spouse or even the children.

But what about the opportunities provided by spouse contributions? Let's return to our case study where John was just about to receive a large redundancy payment and had access to a significant part of his superannuation.

John should consider putting some of his redundancy money into Marga-ret's superannuation account to stop the future earnings creating an excess benefit. Earnings on her money will obviously accrue to her account which is unlikely to create an excess benefit.

If he wanted to cash his superannuation/ redundancy then Margaret may be able to use the money to contribute to her own account. She could do this if she is under age 70 and currently working at least 10 hours a week (or less than age 65 and worked at least part time in the past 2 years).

Alternatively, and more importantly, John may be able to make a spouse contribution if Margaret is not working. John could do this with his redundancy or superannuation payout as long as they fulfil the normal criteria for spouse contributions. For example, in this case Margaret would have to be under age 65 (or between 65 and 70 and currently working) and John would have to be an Australian taxpayer. If John wants to claim the rebate of $540 on the first $3,000, then he must also be resident for tax purposes and Margaret must have as-sessable income of less than $10,800 (phased out up to $13,800).

The use of spouse contributions will help stop any future earnings from creating an excess benefit for John. They will also be good for creating a tax effective income stream in the future for Margaret.

Obviously this strategy will be dependent upon the strength of the relationship between John and Margaret. If separation is a possibil-ity then John may be loathe to consider this opportunity. However, under new rules for divorce (not expected until the next century), Margaret would be able to get access to part of John's superannua-tion.

In conclusion, a financial planner should consider the myriad of dif-ferent opportunities available when writing a plan for a client with an RBL problem. Don't forget there are many different ways to skin an RBL cat.

Kevin Smith is associate director, technical services at Rothschild Australia Asset Management.

Break-out 1

Tips

If you cash a redundancy payment from a non-associated employer then only 85 per cent of the post July 1983 component counts for RBL pur-poses. If you roll it over then all the pre July 1983 component is also included.

Don't forget the effect on the deductible amount. Obviously a spouse contribution is an undeducted contribution and hence will create a deductible amount when a pension is commenced. However watch out if the spouse has a much higher life expectancy.

Break-out 2

Traps

If the client is under 55, then don't forget that the RBL is dis-counted for 2.5 per cent for every year under that age.

You need to consider the amount of tax on the pre July 1983 and post June 1983 monies that are being cashed out of his account. Also, be wary of the impact on the Medicare surcharge.

You need to consider any surcharge implications of the transaction. This is particularly important when a redundancy payment or golden handshake is involved.

If you make a spouse contribution, then the money will be preserved. If the spouse has never worked, then it will ordinarily be preserved until age 65.