Contribution Splitting Regulations By Jenny Willcocks | February 2006
The Tax Laws Amendment (Superannuation Contributions Splitting) Act 2005 (‘the Act’) was assented to on 14 December 2005, amending the Income Tax assessment Act 1936 (ITAA) to deal with the tax consequences of splitting contributions between a member of a superannuation fund and his or her spouse. On 15 December 2005 the Government released The Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 8) (the Regulations). The Regulations amend the Superannuation Industry (Supervision) Regulations (SIS Regulations) from 1 January 2006 to facilitate trustees of superannuation funds splitting contributions between a member and their spouse. This paper provides an overview of how the Regulations will operate and the steps trustees need to take in determining whether they will offer contribution splitting to members.
Background Superannuation contributions splitting should not be confused with splitting benefits under the Family Law Act. Contributions splitting permits a member of a superannuation fund to split specified contributions paid to the fund with their spouse. Not only does this allow the benefit to be shared, but provides access to two eligible termination payments (ETP) low rate thresholds and two reasonable benefit limits (RBLs).
REQUESTS TO SPLIT AFTER 30 JUNE 2006 Although the Regulations apply from 1 January 2006, a member can only make a request to a trustee to split contributions paid in the last tax year. Therefore, after 30 June 2006 the member can request contributions paid between 1 January 2006 and 30 June 2006 to be split. In subsequent years the request can be made after 30 June in each year for contributions paid during the previous 12 months.
RIGHT TO SPLIT CONTRIBUTIONS IS VOLUNTARY It is important for trustees of superannuation funds to understand that offering members the option to split contributions with their spouse is not mandatory. Consequently trustees must determine whether it is in the best interests of their members to provide this service and if so when and on what basis. A checklist is attached to this paper listing some of the issues trustees will need to address in making this decision.
New Division 6.7 In SIS Regulations The Regulations insert a new Division 6.7 into the SIS Regulations. That Division applies to: (a)
an accumulation interest; and
(b)
a defined benefit interest that is not a “defined benefit component”.1
The Division does not apply to an interest subject to a Family Law payment split; or on which a payment flag (as defined in Part VIIIB of the Family Law Act 1975) is operating.2
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What Contributions Are Splittable? DEFINITION OF “SPLITTABLE CONTRIBUTION” A “splittable contribution” is: (a) (b)
A contribution to a regulated superannuation fund on or after 1 January 2006; or An “allocated surplus contribution amount”, allocated on or after 1 January 2006.3
MEANING OF “ALLOCATED SURPLUS CONTRIBUTION AMOUNT” An “allocated surplus contribution amount” is an amount allocated from a fund surplus by a trustee to meet an employer’s liability to make contributions.4 In other words what the industry generally refers to as an employer “contribution holiday”. Note the definition of this term would not include a member “contribution holiday”.
WHAT DOES “ALLOT” MEAN? The term “allot” for Division 6.7 means to credit an amount from a member’s account to another account in the regulated superannuation fund held by, or created for, the spouse receiving the contributions split (the receiving spouse)5 except by transfer or roll-over.6
TAXED & UNTAXED CONTRIBUTIONS Splittable contributions can be taxed or untaxed: (a)
Taxed Splittable Contributions These are deductible contributions and include employer contributions that are taxable under section 274 of the ITAA. They also include amounts paid by the Australian Tax Office to compensate members when the employer fails to pay the Superannuation Guarantee contribution, and amounts allocated from surplus as contributions.7
(b)
Untaxed Splittable Contributions These personal contributions for which no tax deductions are allowed and include member contributions or amounts paid by another person which are not taxable contributions (e.g. personal undeducted contributions and superannuation co-contributions).8
MAXIMUM SPLITTABLE AMOUNT The maximum amount that can be split in a financial year is as follows: (a)
Taxed splittable contributions9 - 85% of the amount of the taxed splittable contributions made in the financial year; and
(b)
Untaxed splittable contributions10 - 100% of the amount of the untaxed splittable contributions made in the financial year.
The Application must indicate the amount of the member’s taxed and untaxed splittable contributions to be split to the receiving spouse.11
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The 85% limit on taxed splittable contributions is to ensure members cannot split more than the amount remaining in their superannuation fund, which relates to those taxed splittable contributions. Therefore it is the total amount of deductible contributions net of the 15% contributions tax that may be split.
What contributions are not splittable? The following amounts paid for a member of a fund will not be “splittable contributions”: (a) (b) (c) (d)
an amount rolled over or transferred; an amount “allotted” under Division 6.7; a lump sum from an eligible non-resident non-complying superannuation fund; and employer eligible termination payments (ETPs) referred to in (a) to (jaa) of the definition of ETP in subsection 27A(1) of the Income Tax Assessment Act 1936.12
Tax Treatment of Amount Split The amount paid to the receiving spouse is treated as a superannuation contributions-splitting ETP13 for income tax purposes, and dealt with as if it has been rolled over to the receiving spouse’s account. The ETP can be rolled over or transferred between superannuation Funds and RSAs or allotted within the same fund or RSA. The member who executes the split does not transfer his or her eligible service period to the receiving spouse, whose eligible service period for the purpose of the contributions-splitting ETP will be zero. The amount split and paid to the receiving spouse is preserved. Although the tax concessions provided by contributions splitting are attractive it is important for members to understand that they need to be considered in the context of their personal financial situation. Seeking professional advice should be encouraged.
Application To Split Contributions An application to split contributions may be made in a financial year and be equal to the amount of the splittable contributions made by, for, or on behalf of the member in: (a) (b)
the last financial year ending prior to the application; or the financial year in which the application is made if the member’s entire benefit is to be rolled over or transferred in that year.14
When will an Application be invalid? An application is taken to be invalid If: (a) (b)
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a member has already made an application in the financial year and the trustee is considering or has given effect to that application; or the amount of benefits to which the application relates exceeds the maximum splittable amount; or
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(c)
the spouse is aged 65 years or more, or between the relevant preservation age and 65 years, and has permanently retired from the workforce at the time the application is made.15
There is an exception to part (c) above where the application includes a statement by the receiving spouse that he or she is under the relevant preservation age, or is aged between that age and 65 years and has not retired from the workforce.16 Limiting applications to one per financial year should simplify administration for trustees.
Acceptance by Trustee of Application A trustee can only accept an application to split contributions from a member if it meets the following conditions: (a) (b) (c)
it complies with the requirements of regulation 6.44 as set out above; the trustee has no reason to believe a statement under SIS regulation 6.44(3) by the receiving spouse as to age and retirement referred to above is untrue; the amount the application relates to does not exceed the maximum splittable amount for the relevant financial year.17
Time to Process Application The Trustee on accepting an application must roll over, transfer or allot the amount of contributions to be split for the benefit of the receiving spouse as soon as practicable but in any case within 90 days of receiving the application.18 Although the obligation to pay the benefit does not arise until the trustee actually accepts the application, the 90 days will run from the date of receipt. (a)
Untaxed splittable contributions When an application splits untaxed splittable contributions it can only be processed if the amount payable to the receiving spouse does not exceed the undeducted contributions that would form part of an ETP payable to the member if he or she withdrew his or her entire benefit at the time the trustee gives effect to the application.19
(b)
Taxed splittable contributions When an application splits taxed splittable contributions it can only be processed if the amount payable to the receiving spouse does not exceed the taxed element of the post-June 83 component that would form part of an ETP payable to the member if he or she withdrew his or her entire benefit at the time the trustee gives effect to the application.20
Self-employed Members Claiming a Deduction for Contributions The Act made amendments to Section 82AAT of the ITAA which deals with how a self-employed member gives notice of his or her intention to claim a tax deduction for contributions.
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The amendment made to Section 82AAT means that if a person has made an application to split contributions and that application has not been rejected by the trustee the person cannot give a Section 82AAT Notice concerning those contributions. This does not prevent the person giving the notice before making the application to split contributions. Trustees must therefore ensure that members are aware of these requirements and that the timing for lodging these applications is critical.
Conclusion The tax concessions offered by contributions splitting will be attractive and consequently whether a fund offers members the option to split contributions will be market driven. Members may vote with their feet if they are eligible for fund choice and their current fund fails to provide the option of splitting contributions. Trustees who decide to offer this option therefore need to have a process in place before 30 June 2006 to ensure members can take advantage of splitting contributions at the earliest time. This is a relatively short time frame to implement the necessary procedures, system changes and communications required as will be apparent from the attached checklist. Trustees must therefore determine what position they will adopt at the earliest possible time.
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Checklist REQUIREMENTS FOR OFFERING CONTRIBUTIONS SPLITTING 1
Initial decision whether to offer contribution splitting This should include an assessment of the requirements, costs of implementing, member demand and management of any risks involved.
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From what date will it be offered? It is not mandatory and therefore trustees can determine a date from which to offer this service. This can be the commencement date or a later date trustees believe appropriate to provide them with sufficient time to set up for contributions splitting.
3
Terms and conditions Trustees need to determine on what basis they will allow members to split contributions. As it is not mandatory trustees can impose reasonable conditions on this service in order to simplify administration.
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How will it be paid for? Trustees need to determine how this service will be paid for. Will a user pays approach be adopted and if so what costs will be charged? Will it be a service offered to all members and added to administration fees? Allocation of fees will need to be consistent with the Fund Rules and the requirements of SIS.
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Forms and Procedures Application forms - The Tax Office will be publishing a template for the application, which can be adopted by superannuation funds. Alternatively a fund can develop its own application forms. The application will need to include: • • • •
The amount to be split from either or both taxed and untaxed splittable contributions. Membership details for the superannuation account of the receiving spouse; Other details necessary to pay the splittable amount; Evidence that the receiving spouse has not reached preservation age or is between preservation age and 65 years of age but has not retired.
Procedures to be used to allow members to lodge an application complying with SIS need to be developed, communicated to members and staff. This will need to include: • • •
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how applications are reviewed to determine if they are valid (e.g. do they exceed the maximum amount, have unsplittable contributions been nominated). What will occur if they are invalid. Procedures for rollover of the splittable amount within the fund or to another eligible fund.
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Trust Deed Amendments The Fund trust deed needs to be reviewed and amended to ensure that the trustee has the power to offer contribution splitting on the basis that it determines. As this is a new concept it is unlikely that the Fund trust deed addresses splitting contributions.
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Amendment of PDS and other member communications • • • •
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The Fund's PDS or Member booklet will need to be updated to include sufficient information for members to understand the service being offered and how to apply to split contributions. Appropriate warnings for self-employed members who lodge Section 82AAT notices that these must be lodged before the application to split contributions. Benefit statements will need to reflect any contributions that have been split. Information on the Website will need to be updated.
System changes System changes will be needed to record applications to split contributions and keep track of data. Some examples are: • • • • •
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Training • • •
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Record the date of receipt of an application and when the 90 days to process it will expire. Identify the splittable amount and compare it against the maximum limits imposed. Identify whether taxed or untaxed contributions are being split and in what proportion. Adjust the benefit and contribution data to take account of the amount split. Check whether an application has already been lodged in the current financial year.
Staff will need to be trained on the procedures involved, reviewing applications and approving or rejecting them. Call Centre staff will need appropriate scripts to deal with enquiries. Training will also be needed on completing the ETP forms and rolling over the splittable amount to the receiving spouse's superannuation fund.
Inform members Current Members will need to be informed that this service is available and how to take advantage of it.
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Footnotes 1
SIS Regulation 6.43(1) - A “defined benefit component” is defined in SIS Regulation 6.31 and requires reference to one or more components relating to a member’s salary or
other factors. 2
SIS Regulation 6.43(2)
3
SIS Regulation 6.42
4
SIS Regulation 6.40
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If a trustee accepts an application under SIS subregulation 6.44(1) to split contributions the applicant’s spouse is the “receiving spouse”.
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SIS Regulation 1.03(1)
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SIS Regulation 6.41(1) and (2)
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SIS Regulation 6.41(3) and (4)
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“taxed splittable contributions” is defined in SIS regulation 6.41(1) and (2) and includes an allocated surplus contribution amount.
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“untaxed splittable contribution” is defined in SIS regulation 6.41(3) and (4)
11
SIS Regulation 6.44(4)
12
SIS Regulation 6.42(2)
13
Defined in Subsection 27A(1) of the ITAA
14
SIS Regulation 6.44(1)
15
SIS Regulation 6.44(2)
16
SIS Regulation 6.44(3)
17
SIS Regulation 6.45(1)
18
SIS Regulation 6.45(2)
19
SIS Regulation 6.46(3)
20
SIS Regulation 6.45(4)
For more information please contact: Jenny Willcocks Partner T: 03 8600 5001 jenny.willcocks@turkslegal.com.au
Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099
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