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The Federal Government
has recently amended the Income Tax Assessment
Act so that superannuation contributions can
be split with an eligible spouse.
Under the Tax Laws Amendment (Superannuation
Contributions Splitting) Act 2005, superannuation
contributions can now be split to an account
held by your spouse, either within the same
fund as the member or to a different fund,
subject to certain age and workforce participation
conditions.
The new measures provide couples with an avenue
to share their superannuation benefits and
allow single-income families access to two
eligible termination payment (ETP) low rate
thresholds and two reasonable benefit limits
(RBLs) in a similar way to dual income families.
It should be noted though that this is a voluntary
regime and superannuation funds are not compelled
to offer contribution splitting.
How the new system works
A fund member can split superannuation contributions
made on or after 1 January 2006 if the following
conditions are met:
- they have accumulation style superannuation
benefits;
- their benefits are 'splittable' (see
below for more details);
- their superannuation fund offers contribution
splitting;
- they have a spouse - defined as someone
of the opposite sex who lives with you
on a bona fide domestic basis; and
- their spouse is not aged over 65 and
is not retired.
The legislation allows both taxed and untaxed
super contributions to be split. Taxed contributions
include employer contributions, superannuation
guarantee entitlements and allocated surplus
contribution amounts. Untaxed contributions
include personal undeducted contributions
and super co-contributions.
The maximum splittable amount for any financial
year is 85% of the taxed contributions and
100% of the untaxed contributions. The 85%
limit on taxed contributions is designed to
ensure that members cannot split more than
the amount remaining in their superannuation
fund.
Changes will benefit high net worth individuals
As mentioned earlier, the new rules allow
single income couples to access two ETP low
rate thresholds and two separate RBLs. The
changes could provide important financial
planning opportunities for high net worth
individuals but will not affect most workers
given that the average super payout for 50-to
69-year-olds is around $83,000 (well below
both the lump sum RBL and the ETP low tax
threshold).
The other key advantage is that each member
of a couple will be able to claim the superannuation
pension and annuity tax offset once their
benefits are drawn down as an income stream
in retirement.
Not all contributions can be split
Only amounts that are received as contributions
by your current superannuation fund
can be split.
This means that none of the following are
splittable:
- Amounts received for a member of a
regulated superannuation fund that have
been rolled over;
- Lump sum payments from a non-resident
non-complying superannuation fund;
- Payments made as a consequence of the
termination of employment or as a result
of the disposal of an asset;
- Superannuation contributions that are
subject to a split under a Family Court
order;
- ETPs resulting from the small business
retirement provisions.
If you or your employer make contributions
to a superannuation fund which are rolled
over to another fund before the end of the
financial year (or before a splitting application
is lodged), these amounts must be treated
as rollovers by the receiving fund and cannot
be split with your spouse.
Therefore, if you wish to split contributions
with your spouse, this needs to be done before
rolling over your entitlements.
It is also worth highlighting that contributions
which are split to a spouse's account do not
retain any of the characteristics of the applicant's
benefits. All 'contributions-splitting ETPs'
are classified as post-June 1983 components
in the spouses account. Likewise, the eligible
service period of the applicant does not transfer
to the receiving spouse's contributions-splitting
ETP.
Making a contributions-splitting application
A splitting request can generally only be
made in respect of contributions made in the
previous financial year. As a result, a fund
member will have to wait until the end of
the current financial year to make a splitting
application.
However, if the entire benefit is to be rolled
over or transferred, a request to split contributions
can be made before the end of the financial
year.
Under the regulations, an application to split
an employee's contribution must be accompanied
by a statement from the spouse that they:
- are not retired if they are between
their relevant preservation age and age
65, or
- are below their relevant preservation
age.
The application also needs to specify the
proportion to be split from the member's taxed
and untaxed splittable contributions.
Preservation
A contribution splitting ETP is a preserved
benefit. This means that the receiving spouse
cannot withdraw any benefits until they reach
preservation age or meet some other condition
of release.
The preservation age for those born before
1960 is 55. For those born between 1 January
1960 and 30 June 1964, their preservation
age is between 56 and 59. For those born on
or after 30 June 1964 the preservation age
is 60.
Claiming a tax deduction or tax offset
If you intend to claim a tax deduction for
personal contributions made to your superannuation
fund, this should be notified to the fund
trustee before lodging a contributions-splitting
application. If your intention to claim a
deduction notice is submitted after your request
to split contributions, the notice may not
be accepted.
Self-employed people who would normally claim
a tax deduction for their super contributions
will not be able to claim a deduction for
that portion which is split with their spouse.
Similarly, the spouse contributions tax offset
cannot be claimed because the amount received
by your spouse is treated as an ETP rollover,
not a contribution. If you intend to claim
a tax offset for contributions to a spouse's
superannuation account, you must make the
contributions directly for the benefit of
your spouse and your spouse's assessable income
must be less than $13,800.
Trustees Duties
If a super fund trustee accepts a valid contributions
splitting application, the request must be
processed within 90 days. However, the trustee
is not compelled to accept an application,
even if all the relevant requirements are
met.
The trustee may decline to split a member's
contributions if:
- splitting the contributions would leave
insufficient funds to meet a tax liability
or fund charges;
- the request exceeds the maximum splittable
amount (i.e. 85% of taxed contributions
or 100% of untaxed contributions made
in the past financial year);
- the member's spouse is aged over 65,
or is aged between the relevant preservation
age and 65 years of age and is permanently
retired.
Summary
The changes outlined in the Federal Government's
new super contributions splitting legislation
provide significant financial planning opportunities
for wealthy and higher income earners but
are of limited use to most workers whose superannuation
payouts are well under the lump-sum RBL limit.
The key advantage of the new measures is that
single income couples can now access two ETP
tax-free thresholds, two RBLs and claim the
pension and annuity tax offset once their
benefits are drawn down as an income stream.
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