News 05/06

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

In previous editions of e-SuperUpdate we have seen how Fred and Wilma could use the superannuation rules by commencing a transition to retirement pension and using salary sacrifice. In this edition we will look at how they can use the contribution splitting rules to their advantage.

From 1 January this year the superannuation rules permit people to split superannuation contributions with their spouse. This allows married and de facto couples the ability to ‘even up’ their superannuation benefits prior to retirement. The result provides greater access to tax free lump sums after a person reaches age 55. It also provides more efficient use of the reasonable benefit limits (RBLs) for each person. While this years Federal Budget proposes to abolish RBLs from 1 July 2007 super splitting continues to be useful for a range of people.

Contributions can be split where the spouse is under age 55 or is between age 55 and 65 and has not permanently ceased work. Permanently ceasing work means retired from gainful employment and not intending to work more than 10 hours per week in future.

Where contributions are made to superannuation for a person the amount that can be split to their spouse is limited to 85% of taxable superannuation contributions and 100% of undeducted contributions.

To allow the contributions to be split an application must be made to the fund trustee between 1 July and 30 June in the financial year after the contributions have been made. However, if a person transfers all of their benefits out of the fund an election can be made to split contributions during the year in which contributions were made. Remember Fred, Wilma and the Stonyrock Superannuation Fund from previous editions of e-SuperUpdate*. We saw that Fred had a balance of $600,000 in the fund and Wilma had a balance of $170,000 which includes undeducted contributions of $100,000. We last saw how Fred’s balance in the fund increased to $655,499 when his company made the maximum tax deductible contribution to superannuation and Fred commenced a transition to retirement pension.

Here’s what Fred’s pension and accumulation account would look like in his superannuation fund if he commenced the transition to retirement pension and his company contributed the maximum tax deductible amount to the fund.

However, if we take a step back Fred probably has two options available. He can leave the contributions in his account in the fund or he could take advantage of contributions splitting and transfer a portion of the contributions made after 1 January 2006 to Wilma’s account. As Wilma has much less than Fred in her superannuation account the transfer will assist to build Wilma’s balance in the fund for her retirement.

As we know, Fred’s company contributed the maximum tax deductible amount to superannuation of $100,587. If Fred’s company had made the contribution to superannuation for him after 1 January 2006 and before 1 July 2006, 85% of the contribution can be split off to Wilma.

How does Fred transfer the amount from his account in the fund to Wilma? Any election to split contributions for this financial year which ends on 30 June 2006 can be made by Fred in the next financial year (from 1 July 2006 to 30 June 2007). Fred would need to make an election by writing to the trustees of the Stonyrock Superannuation Fund and request the transfer of 85% of his taxable contributions to Wilma’s account. It is useful if the request is recorded in the fund minutes. The next thing to do is to record the transfer of the relevant amount from Fred’s account balance to Wilma’s account balance. Let’s see what the transfer looks like in the Stonyrock Superannuation Fund accounts:

There are a number of benefits resulting from the transfer of 85% of Fred’s taxable contribution to Wilma’s account:

• Wilma’s account is increased so that she is able to receive greater pensions in retirement.
• If we assume Wilma’s account in the fund includes undeducted contributions of $100,000 and the remainder of her benefit is a post 83 component then the transfer of Fred’s contributions will allow use of the full amount of the ETP low rate threshold of $135,590 (2006/07 financial year). If Fred had not split off his taxable contributions to Wilma then she could only use $70,000 of the threshold if she could take a lump sum at this stage.
• If Wilma qualifies she could use a recontribution strategy by using the age 55 post 83 tax free amount lump sum. If eligible, Wilma could then contribute the amount back to superannuation as an undeducted contribution. This will give her a greater proportion of the ultimate pension tax free.

In this edition of e-SuperUpdate we have seen how superannuation splitting can provide a number of advantages to Fred and Wilma prior to reaching retirement.

When superannuation splitting is coupled with salary sacrifice and transition to retirement legislation, we now have a very powerful planning and taxation tool. With the introduction as proposed by the budget on 9th May these strategies are even more attractive giving you a greater foundation to build your retirement income streams. Put simply you may need more time to plan.