Contribution Splitting: The 50/50/500 Rule

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1 Contribution Splitting: The 50/50/500 Rule TONY NEGLINE The information in this document is general information only and cannot be relied upon as a substitute for professional advice. You should seek specific advice relevant to your own circumstances from appropriately qualified persons. Document provided by TOWNSENDS BUSINESS & CORPORATE LAWYERS Tel

2 A common popular marketing theme used to attract people to Self Managed Super Funds is the idea that these funds can be used by more than one generation at the same time. Fifty, Fifty, Five hundred may become industry shorthand for describing the Gillard Government s superannuation policy which will apply from 1 July From that date super investors who are aged at least 50 and have less than $500,000 in super assets will have a Concessional Contribution Cap of $50,000. The precise details of how this policy will work are unknown. The current unknowns are as follows: 1. When age 50 is determined at the start, during or end of a financial year? 2. At what point and how will the $500,000 in super assets be assessed? Last February the Government released a discussion paper on some of options for the design of this policy. Of these unknowns the Government s discussion paper proposes three different alternatives on how the $500,000 will be measured: 1. All withdrawals from super would be tracked and counted towards the $500,000 threshold. Under this option withdrawal is not defined but it seems to only include lump sums and pensions. Additionally from what date withdrawals are counted is also not known. If withdrawals are used to assess access to the higher Concession Contribution Cap then we ll have a defacto return of the Reasonable Benefit Limit system. Surely only the grossly envious would want this outcome 2. All withdrawals would be ignored and the super investors account balance would be the only check to determine if the $500,000 threshold has been breached 3. If any money is withdrawn from the super system then access to the increased Concession Contribution Cap would be denied Until we know the precise design features of this policy is difficult to determine the best way to work around it. One super strategy which may be handy is contribution splitting. Super contribution splitting allows a member to transfer contributions made during a financial year to their spouse. SCS may be useful if super funds withdrawals (lump sum or pension) are not used to determine eligibility. It may also be useful if withdrawals are counted against the $500,000 limit but movements caused by SCS are not counted as a withdrawal and hence are ignored. It may be that SCS is useful in the 2011 financial year and possibly later. Page 1

3 So how does SCS splitting work? Firstly contribution splitting is not compulsory for super funds. This means that you should check your fund s trust deed and administrators to determine if the strategy can be adopted. Next it appears that it is available for all spouses including same-sex spouses. Whilst a couple might satisfy the normal spousal rule, there is a further rule which also has to be considered. Contributions cannot be split if the receiving spouse is: 65 years or older; or is aged over preservation age (55 for those born before July 1960) and under age 65 and doesn t satisfy a super preservation Condition of Release such as retirement. A fund can split contributions if the receiving spouse can declare that they might be aged between preservation age and 65, but they don t satisfy a Condition of Release. Is a spouse who has never worked or, at best, has not worked for many years entitled to claim that they aren t retired? Their declaration presumably has implications for gaining access to Preserved Benefits. In many cases this will turn on complex factual issues. Ordinarily this is a very tricky issue for super funds and financial planners to sort out and comply with correctly. Good documentation, including keeping appropriate file notes, will be essential. In arrears Contribution splitting can only be done in the year after a financial year has ceased. For example, contributions made during the 2010/11 year can only be split during the 2012 year. Once the 2012 year has finished, the 2011 year contributions cannot be split. There is one exception to this rule. Contribution splitting is allowed during a financial year when a member is rolling over or transferring their entire account balance. One application per annum The super splitting regulations only allow a super fund to accept one member contribution splitting application per annum. This restriction is presumably to limit fund administration costs. (Imagine the cost of processing contribution splitting applications of $100 which are made each day of a particular year.) Trustee must act within a certain timeframe Although the splitting rules say trustees must act on a splitting application as soon as possible (or in any case within 90 days of receiving an application) the splitting rules are not Page 2

4 an operating standard applying to all super funds and there appears to be no penalty for funds that do not adhere to the above maximum timeframe. Maximum that can be split This maximum is 85% of contributions taxed in the super fund. Typically this will be Concessional Contributions (i.e. all employer or member deductible contributions). No part of any rollover or benefit transfers can be split. Any contributions subject to a super divorce payment split cannot be split. Additionally only contributions made into a super fund s accumulation benefits can be split. This means contribution made to defined benefit funds cannot be split. Special rules for personal deductible contributions Personal contributions not claimed as a tax deduction cannot be split. This means that if a super fund member wants to claim their personal contributions as a tax deduction and will want to split those contributions with their spouse then the request to claim the deduction must be sent to the super fund first. The notices which permit the contributions to be claimed as a tax deduction will make the contributions taxable in the super fund and hence splittable. How a member asks for contribution splitting A member must apply in writing to have their contributions split. The ATO have developed a form for this purpose. It is known as NAT Trustee must act within certain time frame A trustee who does not reject a contribution splitting application must action it within 90 days of receiving it. What can happen to the split contributions? The split contributions can be rolled over or transferred to another fund, or the trustee performing the split can create a member s interest for the receiving spouse. Split contributions must be preserved (unless the trustee is satisfied that the receiving spouse satisfies a relevant preservation Condition of Release, such as death, permanent disability, retirement, etc.). Split contributions are Taxable Component Because the split contributions can only be taxable contributions they will transfer as part of the receiving spouses Taxable Component. Page 3

5 Correspondence with ATO When the contribution splitting rules were first introduced it required that the ATO must be given a statement setting out the matters required by the regulations. The information required has never specified. Example Jim James is aged 62 and has $350,000 in his super fund. He has a salary of $90,000 per annum. His total employer contributions of Super Guarantee and salary sacrifice will be $50,000 this financial year. In July 2011 he completes an ATO super splitting application form (NAT 15237) and splits $42,500 (85% of $50,000) with his spouse who has minimal super. As a result Jim keeps his super balance below $500,000 and his spouse receives some super benefits. He has also potentially retained access to the higher Concessional Contribution Cap for one or more years. Conclusion As noted contribution splitting may not be a valid solution to enabling access to 50, 50, 500. Nevertheless it s still worth giving some thought to. For more information, please contact: SUPERCentral Tel: +61 (02) info@supercentral.com.au Page 4