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Evening up the score
Contribution splitting is a strategy allowing spouses to even up a disparity in their superannuation balances. Smarter SMSF technical and education manager Tim Miller details the key requirements needed to implement this course of action.
Introduced all the way back in 2006, contribution splitting is a strategy that allows a member of a superannuation fund, including SMSFs, with an accumulation interest to split certain contributions with their spouse. It is a highly useful strategy not only to help in the management of a member’s total super balance (TSB), but also to assist with spousal balance discrepancies prior to a time that members can actively engage in recontribution strategies, like when they reach preservation age or retire.
This article will not only look at all of the necessary conditions that must be met for a splitting application to be valid, but also at how contribution splitting can be used with other strategies members might use to channel money into super and how it can impact others.
Who can split?
Contribution splitting is only possible between spouses and in this regard spouse takes on its usual meaning, that is, inclusive of both legally married individuals and also de facto couples. This means the relationship must be current. It should be noted contribution splitting should not be confused with superannuation splitting, which is the term often associated with relationship breakdowns and payment splits.
The receiving spouse must be under age 65 and if they have reached preservation age, they must not have met a condition of release, with a nil cashing restriction, such as retirement.
What contributions can you split?
Only concessional contributions can be split and these are referred to as splittable contributions. The rules differentiate between taxed splittable contributions and untaxed splittable contributions. For the purposes of splitting, SMSF members will only have taxed splittable contributions. They include:
• employer contributions (including salary sacrifice),
• personal contributions where a personal deduction has been claimed,
• contributions made by family or friends (excluding spouse and contributions for children under 18), and
• certain assessable allocations from reserves, that is, an allocation to meet an employer’s contribution obligation (unusual in SMSFs).
Contributions that can’t be split include:
• personal non-concessional contributions,
• capital gains tax cap contributions,
• personal injury contributions,
• spouse contributions,
• contributions made for members under the age of 18 (excluding employer contributions),
• transfers from foreign funds,
• other allocations from reserves,
• rollover super benefits,
• contributions that have already been split,
• government co-contributions,
• government low-income super tax offset contributions,
• First Home Super Saver Scheme contributions,
• downsizer contributions,
• temporary resident contributions,
• trustee contributions, and
• super interests that are subject to a payment split (due to a relationship breakdown).
How much can be split?
A member can split up to the lesser of 85 per cent of the concessional contributions made for the year and the concessional contribution cap for the year the contributions were made.
That last point is relevant as in most instances the contribution splitting application will occur in the year following the contributions, however, there are circumstances where the splitting application is made in the year of the contribution.
An SMSF member may apply to split contributions in the financial year in which the contributions are made, but only if the member’s entire benefit is to be rolled over or transferred in that year to another fund or to commence an income stream.
Application validity
An application is valid if it includes a statement from the receiving spouse that, at the time of the contributions, he or she is either between his or her preservation age and 65 and not retired or is under preservation age. This statement is made via a declaration on the ATO’s “Superannuation contributions splitting application” form.
Invalid application
Applications are invalid if the spouse doesn’t meet the above conditions or in the event the contributing spouse has already applied and the trustee has received the application or the amount intended to be split is greater than the maximum amount allowable.
Trustee’s decision on member’s application
An SMSF trustee may only accept a member’s contribution-splitting application if all of the necessary conditions are satisfied. That is:
• the application complies with the regulations,
• the trustee has no reason to believe the statement from the receiving spouse is untrue, and
• the application relates to an amount that is not more than the maximum splittable amount for the year.
A trustee who accepts a member’s application must roll over, transfer or allot the amount within 90 days of receiving the application.
Tax and other consequences
The splitting of a member’s contributions with their spouse has the following consequences:
• a new superannuation benefit is created for the spouse,
• the new superannuation benefit is treated as a rollover if rolled over to another fund or if transferred to an account in the existing fund in the spouse’s name. It is not treated as a contribution to the spouse’s fund, and
• the new benefit consists entirely of a taxable component.
Splitting example
John is 55 and maximises his concessional contributions each year. His spouse, Alison, is 53 and also maximises her contributions during the year, but due to years out of the workforce her superannuation balance is substantially lower than John’s. To improve this situation they decide to engage in strategies to equalise their balances. John’s TSB at the previous 30 June was $600,000 so his concessional contribution cap is $27,500. Based on the contributions made during the 2023 financial year, his splittable contributions are as in Table 1.
As John has not rolled over his balance, nor commenced an income stream, then during 2023/24 he can complete an application to split $23,375 to Alison. She is under preservation age so can comfortably sign the declaration to that effect and the fund can process the split.
Strategy stacking
Contribution splitting can be complemented by two other often spoken about contribution strategies. They are the carry-forward provision for unused concessional contributions cap amounts and contributions reserving and reallocation.
Carry-forward unused concessional contribution cap
As is well established, from 1 July 2018, where a member has not used their entire concessional contribution cap in a financial year, they can carry forward the unused portion of the cap if they have a TSB less than $500,000 at the previous 30 June. Unused amounts can be accessed on a rolling basis for five years and amounts carried forward not used after five years will expire on a first in, first out basis.
The first year in which a member was able to access unused concessional contributions was the 2020 financial year.
Contribution reserves
The ATO confirmed in its SMSF Regulator’s Bulletin 2018/1 that contribution reserves are allowed. As we know, contribution reserves are not considered reserves in the traditional Superannuation Industry (Supervision) Regulations sense, but rather are viewed as short-term warehousing accounts or suspense accounts. Their feature is they regularly go back to $0 due to time allocation requirements dictating contributions must be allocated within 28 days following the end of the month the member makes the contribution.
For funds contemplating this strategy, we appreciate it is only beneficial for contributions made in June as the allocation can be made in July, ultimately allowing for a deduction to be claimed in the year of the contribution and the allocation allowing the contribution to count towards the following year’s cap.
It should be noted even where the amount is held in a short-term contributions reserve to be allocated in the following year, the ATO administrative process is for contributions to be reported as being made and received in the (same) earlier year and then the completion and lodgement of the ATO “Request to adjust concessional contributions” form (NAT 74851) by the individual to avoid excess contributions.
SMSF trustees must ensure their deed provides for this and that each step is appropriately minuted.
The benefit of these two strategies is they allow a member with a total superannuation balance below $500,000 to potentially have a higher concessional cap, but further, the use of contribution reserving provides an opportunity to split more earlier.
Example with carry-forward concessional contribution cap
Let’s look at the example of Helen, 45, who earns $100,000 a year and receives employer super guarantee (SG) contributions. In 2022/23, she sold an investment property she purchased prior to getting married, making a significant capital gain. Let’s examine her position with regards to her unused carry-forward concessional contribution cap (see Table 2).
From 2018/19 to 2021/22, Helen’s employer made SG contributions to her SMSF, her TSB at 30 June 2022 was $485,000 (that is, less than $500,000) and she had an unused concessional contribution cap amount of $64,000 that could be carried forward to the 2023 financial year.
In 2022/23, Helen had a net capital gain of $100,000 from the sale of an investment property and made contributions for the financial year as in Table 3.
Helen wishes to split her 2022/23 contributions with her husband, Jack, 45, who is self-employed with $100,000 in superannuation.
She completes a splitting application indicating she wishes to split $91,500 of her taxed splittable contributions.
Her concessional contributions cap for the financial year is $91,500 (the general cap of $27,500 for 2022/23 plus the unused concessional contributions cap amount of $64,000 from 2018/19 to 2021/22 that was carried forward).
As a result, the SMSF can accept her application and determines it is valid because $91,500 is the lesser of both:
• 85 per cent of the $108,000 ($91,800) concessional contributions made by her and her employer, and
• Helen’s concessional contributions cap of $91,500.
Helen must lodge the following forms within the required timeframes:
• “Notice of intent to claim or vary a deduction for personal super contributions” (NAT 71121) – for $97,500
• “Request to adjust concessional contributions” (NAT 74851) – for $16,500 to ensure she doesn’t exceed her cap, and
• “Superannuation contributions splitting application” (NAT 15237) – for $91,500.
This strategy provides an opportunity for Helen to stay under $500,000 to make unused catch-up concessional contributions to Jack potentially in the future.
The only downside is if Helen and Jack are first-home buyers as this would not allow them to access the contributions via the First Home Super Saver Scheme.
Overall, contribution splitting is an underrated strategy likely to be used more in an SMSF environment where parties are starting to look at ways of reducing rather than increasing their balance.
