RETIREMENT & LIFESTYLE PLANNING      Baby boomers need to plan their transition into retirement for  Financial Security     Active Health Management  Emotional Wellbeing  Maximum Self Esteem ISSUE - 22 - Autumn 2005/2006

Super splitting

when marriage means money

The introduction of superannuation splitting between spouses on 1 January this year is as important a change as super choice was in 2005. Why? Because it can significantly increase your eventual payout AND cut tax. Unbelievable? No, it's true. Read on for super guru Louise Biti's summary of the 10 things you need to know about this boost to retirement savings.

1. What is super splitting?

The introduction of super splitting means couples can now plan their superannuation as a combined strategy. The accumulating balances can be divided between each partner more evenly to maximise the tax concessions available on the contributions as well as on the benefits received at retirement.

You now can choose whether eligible contributions made into your superannuation account (either by yourself or by your employer) will remain in your account or be transferred to an account in your spouse's name. Your spouse's account can be in the same fund or another fund.

Splitting superannuation contributions in this way helps a couple to accumulate superannuation in the names of both partners, and particularly benefits couples where one person is the primary income earner.

You can choose to split up to 85 per cent of contributions made by:

•  your employer, either as superannuation guarantee, voluntary employer or salary sacrifice contributions

•  you, for which you have claimed a tax deduction. Tax deductions can normally only be claimed by a person who is a sole trader, working in a partnership or unemployed. You should notify the super fund trustee of your intention to claim a tax deduction before making the request to split contributions.

If you make undeducted contributions (i.e. out of after-tax income) you can split 100 per cent of these contributions.

2. Why does it matter?

Superannuation offers tax concessions, which can make it an effective way of saving for your retirement. However,
not everyone has the chance to build super, especially if they leave the workforce to look after children or other family members.

If the superannuation balance accumulates in only one person's name, the tax on retirement benefits may be higher than if the same amount is split between both members of the couple. See the case study for Mark and Margaret on page 43.

3. When does it apply?

You can choose to split eligible contributions that are paid into your fund on or after 1 January 2006, but not any amounts contributed before that date.

After the end of a financial year, you can check the amount of contributions made into your super fund during the previous financial year (but not before 1 January 2006). You then have the current financial year to make a decision on how much to split and ask the trustee of your super fund to transfer this amount to your spouse.

For example, between 1 July 2006 and 30 June 2007 (i.e. 2006/07 financial year) you can ask the trustee
to transfer contributions made into your account from 1 January 2006 to 30 June 2006.

If you are closing your superannuation account during the financial year, you need to let the trustee know if you want to split any contributions made in that year with your spouse. You should ask the trustee to do that transfer before closing the account or rolling your account balance to your new fund.

4. Who benefits?

Couples who will benefit most from super splitting are those where one partner has significantly more money
in superannuation than the other
partner. This typically occurs when
one partner:

•  earns a much higher income,

•  or is not working, perhaps because they left the workforce to look after children or another family member.

The benefits are not just available to high-income earners, but high-income earners are more likely to
have the capacity to save and to use salary sacrifice. Using contribution splitting has two benefits:

•  salary sacrifice may reduce tax for anyone earning over $21,600 (where the 30 per cent marginal tax rate starts). Splitting can help avoid creating an excess benefit against their reasonable benefit limit (RBL – see Jargon breaking box)) by transferring the contributions into their spouse's account


each person is able to withdraw up to $129,751 (in 2005/06) of post-83 component tax-free (see Jargon breaking box this page). Splitting can build up super in both partners' names so they can each use this tax-free portion.

5. What can't be split?

You cannot split:

•   the remaining 15 per cent of employer contributions (including salary sacrifice) and personal deductible contributions – this amount must stay in your fund to pay the contributions tax

•   amounts rolled over to a new fund

•   contributions made before 1 January 2006

•   investment earnings added to your account

•   amounts received as an employer eligible termination payment (ETP) upon termination of employment

•   amounts claimed as a capital gains tax (CGT) retirement exemption upon the sale of a small business.

6. Can anyone use this strategy?

There are some restrictions on who can use this strategy. You can only split contributions with a legally married spouse or a de facto partner of the opposite sex. Super splitting cannot be used by same-sex partners.

The spouse who receives the transfer of super contributions must be:

•   under his/her preservation age – this is an age between 55 and 60 depending on date of birth (see Jargon breaking box this page), or

•   over preservation age but under age 65 and not have satisfied the retirement definition for a condition of release (basically this means that the receiving spouse must be still working at least 10 hours per week or sign a declaration to say that they intend to work again for at least 10 hours per week sometime in the future so they do not have immediate access to the contributions).

These restrictions ensure that contributions transferred to a spouse remain preserved in his/her superannuation account.

7. Will all super funds allow you to do this?

Your super fund can choose to offer super splitting or not. Although it is not compulsory, it is likely that most funds will choose to offer splitting. If you plan to split your contributions with your spouse, you should check with your fund before you make the contributions.

Super splitting can only be offered by accumulation funds. In these funds your final benefit is your account balance, which is determined by the amount contributed and net investment earnings added. Splitting cannot be offered by a defined benefit fund, unless it also has an accumulation account into which contributions are made. In defined benefit funds your final benefit is determined by a formula based on factors such as your final salary and length of service.

8. Can I use splitting in a self-managed super fund?

Yes. The only difference for a self-managed fund is that you are the trustee, so you have to ensure that you follow all the administrative requirements properly.

This means that all contributions will still go into your account. After the end of the financial year you need to write to the trustee of the fund with details for the split request. You should also obtain written confirmation from your spouse that he/she meets the eligibility requirements (see question 6). You then need to do the paperwork to create the eligible termination payment (ETP) and transfer the amount to your spouse's account.

9. Should you change fund if your current fund does not offer splitting?

If you want to use super splitting but your fund does not allow it, you will need to choose another fund to make contributions into. You can then decide if you want to roll all of your existing balance into this new fund, or leave it in your current fund.

Changes introduced last year allow many employees to select a new fund if their current fund does not meet their needs. The employer will then make contributions into this new fund. You should check with your employer if you are able to choose a new fund.

10. What happens if you subsequently get a divorce?

If you get a divorce, you and your ex-spouse need to divide your assets. You can either make your own agreement or let the courts decide. The first step is to decide how much each person will receive, then you can decide how the assets will be split.

Superannuation balances can be split upon divorce. Therefore, you can choose to split one person's superannuation balance and roll it to the other person or alternatively, the other person can receive a greater share of other assets instead of splitting the super.

Because you can split super upon divorce, fear of future marital problems should not be a reason why you would not consider super splitting of contributions.

Louise Biti MTax, BEc, BA(AS),
Dip. FP, CFP, F Fin. is Head of Technical Services for financial services provider Asteron.
Disclaimer: The information in this article is general and does not take into account your particular circumstances. Therefore you should consider whether the information is appropriate having regard to your objectives, financial situation and needs and refer to the relevant Product Disclosure Statement before investing in any product. We recommend specific tax or legal advice be sought before any action is taken. Clients depicted are not real clients.

Jargon breaking

Condition of release – contributions made to a superannuation fund (and investment earnings) are classified as ‘preserved amounts'. This means you do not have access to the money until you meet a condition of release; these conditions are specified in superannuation legislation. The main condition of release is retirement after reaching your preservation age.

Contributions tax – the superannuation fund will deduct
15 per cent tax from any deductible contributions received and send this to the Tax Office.

Deductible contributions – this relates to any employer contributions or the portion of personal contributions for which you claim a tax deduction. If you earn less than 10 per cent of your total assessable income (including reportable fringe benefits) as an employee you may be eligible to claim a tax deduction for personal contributions to super. This will normally apply if you are a sole trader, in a partnership or unemployed. The tax deduction is limited to the first $5000 of your contribution plus 75 per cent of the excess up to a maximum limit based on your age.

Defined benefit fund – in this type
of superannuation fund, your retirement benefit is determined by a formula that takes into account your age, length of employment and salary. This differs from an accumulation fund where the benefit is based on your contributions and investment earnings.

Eligible termination payments (ETPs) – lump sums withdrawn from a superannuation fund, rollover fund or income stream are paid as an eligible termination payment (ETP). An ETP can be rolled over to another fund or income stream or can be taken in cash. Tax is payable on ETPs taken in cash. If employment is terminated, some components of the employer payout are paid as an ETP.

Pre-83 component – if you
joined the super fund (or started employment) before 1 July 1983, part of your deductible contributions plus investment earnings will be classified as a pre-83 component.

Post-83 component – if you
joined the super fund (or started employment) after 30 June 1983,
all of your deductible contributions plus investment earnings will be classified as a post-83 component.
If your start date is before 1 July 1983, part of this amount will
be a post-83 component based
on the proportion of time after
this date.

Preservation age – your preservation age is the minimum age at which you can retire and access your superannuation money. The age depends on your date of birth as set out in the following table:

Date of birth	Preservation age
Before 1 July 1960	55
1 July 1960 – 30 June 1961	56
1 July 1961 – 30 June 1962	57
1 July 1962 – 30 June 1963	58
1 July 1963 – 30 June 1964	59
After 30 June 1964	60

Reasonable benefit limit (RBL)
– this is the maximum amount of superannuation that you can accumulate with tax concessions. There are two RBL limits – a lump sum RBL of $648,946 (for 2005/06) and a pension RBL of $1,297,886 (for 2005/06), although some people may have a higher individual limit approved by the Tax Office. If the RBL is exceeded, higher tax rates apply to any lump sum or income payments received.

Undeducted contributions – personal contributions that are paid from after-tax income. You cannot claim a tax deduction for these contributions.

Richard & Rosemary – Benefits of salary sacrifice and splitting

Richard earns $60,000 per annum and at age 54, he and his wife Rosemary are starting to plan retirement. Due to a previous redundancy, Richard has $480,000
in super, but Rosemary only
has $40,000.

Richard does not currently salary sacrifice into super because although he would save tax, he does not want to create an excess benefit against his Reasonable Benefit Limit (RBL). Each person can accumulate up to $648,946 (lump sum RBL for 2005/06) with concessional taxation on end benefits. If this amount is exceeded, the tax payable on amounts received from super can be higher. However, the good news for Richard is that the recent introduction of super contribution splitting can help his problem.

From 1 July 2006, Richard will ask his employer to salary sacrifice $30,000 per annum. This reduces his gross salary to $30,000. His net salary reduces from $45,240 (after paying tax of $14,760) to $24,690 (after paying tax of only $5310). Salary sacrifice reduces Richard's personal tax bill by $9450 but the $30,000 contribution has $4500 tax deducted within the fund, so the total tax saving is $4950.

After the end of this financial year (i.e. from 1 July 2007), Richard can ask his super fund to roll over up to $25,500 (i.e. 85 per cent of the $30,000 contribution) into Rosemary's super account. His employer is contributing $5400 superannuation guarantee contributions into his account. Richard can also request
the trustee to transfer up to $4590 (i.e. $5400 x 85 per cent) into Rosemary's account.

The tax saving can be used to build their retirement savings. But the contributions can now be accumulated in Rosemary's name to avoid an excess benefit for Richard and to allow Rosemary to take advantage of the tax concessions on super withdrawals or income streams.

Mark & Margaret – Splitting to equalise benefits

The table below shows the tax saving available to Mark and Margaret who use contribution splitting over their lifetimes to equalise their super balances at retirement.

	Without contribution splitting		With contribution splitting
	Super balance	Tax payable if cashed	Super balance	Tax payable if cashed
Mark	$250,000	$19,841	$125,000	$nil
Margaret	Nil	Nil	$125,000	$nil
Total	$250,000	$19,841	$250,000	$nil

By ensuring each person accumulates half of the total super benefits, the total amount can be taken in cash without any tax. This saves $19,841 compared to accumulating all benefits just in Mark's name. Tax benefits would also be available if they decided to take the money as an income stream as they are both under their lump sum reasonable benefit limit, so the 15 per cent rebate would apply to all taxable pension payments received.

Taxing super – how does it work?

The trustee of a super fund will deduct 15 per cent tax from any employer contributions and personal deductible contributions. The super fund also pays 15 per cent tax on net investment earnings.

Tax also applies to amounts taken out of superannuation. The tax rate depends on:

•  the amount of the benefit

•  your age

•  the classification of the money (based on the type of contribution), and

•  whether it is paid as a lump sum or pension.

If the money is taken out of super as cash, the tax payable is shown in the table below:

ETP component	Tax rate
Undeducted contribution, invalidity component, concessional component and CGT exempt component	Nil
Pre-83 component	5% is added to assessable income and taxed at your marginal tax rate
Post-83 component* - under age 55 - age 55 or over	20% (plus Medicare) First $129,751(for 2005/06) is tax free and the balance is taxed at 15% (plus Medicare)
Excess benefit (i.e. over applicable RBL) - post-83 component - other components	38% (plus Medicare) 47% (plus Medicare)

* These tax rates apply to a taxed post-83 component. If the amount comes from an untaxed source (i.e. employer ETP or unfunded super scheme) the tax rates are 15 per cent higher.

If the amounts are taken as an income stream, tax is not payable on the rollover. A portion of the pension payments may be tax-free and the rest is taxable income, which is taxed at normal marginal tax rates. The taxable portion will qualify for a 15 per cent tax offset, which effectively reduces the marginal rate by 15 per cent.

 

The Magazine  Links Page  Home Page  Subscribe now  Retirement Planning  Contacts

Departments  Finance  Issues  Activities  Travel  Health  Business  Property Web YL

Inspired by our articles in Changing Lives and want to change yours? Click here to visit www.getanewlife.com.au to read more about the book and visit some useful resources

	Web www.yourlifechoices.com.au

Your Life, Your Retirement. PO Box 1150N Armadale North Victoria 3143 Australia
Phone: 613 9824 6901   -   Fax: 613 9824 6362
Email: publisher@yourlifechoices.com.au


  IS PUBLISHED BY
Copyright Retirement Publishing Pty Ltd 2001 -- ISSN 1031-6620 ACN 088 049 218
ALL RIGHTS RESERVED No parts of this publication may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the permission in writing from the publishers, with the exception of short extracts for review purposes.

PUBLISHERS NOTE While every effort has been made to ensure the accuracy of the information given in the publication, the publishers do not, in any way accept liability for inaccuracies or for loss of any kind, whether caused through editorial matter or in the form of claims made in advertisements.
Your Retirement is published by Retirement Publishing Pty. Ltd.

IMPORTANT DISCLAIMER No person should rely on contents of this publication or website without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal accounting, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole of any part of the contents of this publication. Without limiting the generality of the above no publisher, author, consultant or editor shall have any responsibility for any act or omission of any author, consultant or editor.