Super splitting: An opportunity for advisers and their clients

Typically, when splitting strategies are recommended, it is usually with a focus on the financial and tax benefits.

However, there is more to consider with super splitting, particularly in managing regulatory risk. Successive governments from both sides of the political spectrum have continually tinkered with superannuation laws, which has resulted in a constant changing of the goal posts under which financial advisers can provide advice.

Equalising super balances between a couple can help minimise the adverse effects of changes to legislation. For example, following the introduction of the Transfer Balance Cap in 2017, the importance of splitting super contributions between spouses has considerably increased.

How does it work

Super contribution splitting, which was introduced from 1 July 2006, allows an individual to split (or transfer) superannuation contributions with their eligible spouse. People can split an amount which is the lesser of:

• 85 per cent of a financial year’s “taxable splittable contributions” plus 100 per cent of “untaxed employer splittable contributions”; or
• the concessional contribution cap (currently $27,500 or higher for those able to utilise the carry forward provision of unused prior year cap amounts).

“Taxable splittable contributions” include the Superannuation Guarantee and salary sacrifice, and personal deductible contributions but does not include non-concessional contributions.

“Untaxed employer splittable contributions” are employer contributions made on behalf of members of a public sector super scheme (although not all public sector schemes offer contributions’ splitting).

Splitting can only be made in favour of a spouse who is under age 65, and, if they have reached their preservation age, not yet retired.

Generally, contribution splitting can only be actioned in the year following the end of the last financial year, and members can only action one split per year. For example, contributions made during the 2021–22 financial year can only be split between 1 July 2022 and 30 June 2023. There is one exception to this rule whereby super contribution splitting is allowed during a financial year when a member is rolling over or transferring their entire account balance to another super fund, or to commence a pension.

Implementing a super splitting strategy enables a couple to rebalance their superannuation savings and provides the opportunity to contribute non-concessional contributions into one or both of their super accounts while they are both still under the Transfer Balance Cap. This allows them to take advantage of the non-concessional contribution cap at any time (or every year) — for example, if they receive an inheritance, are made redundant, or downsize their home at retirement. The flexibility and planning opportunities this may bring is priceless.

Likewise, if changes are made to the superannuation system in the future that target higher super balances, couples who have split their super contributions are less likely to be affected. It can also be advantageous for women who, having taken time out of the workforce for family reasons, have an opportunity to rebuild some of the super lost during their time out of the workforce.

As an example, consider a couple where one partner has a balance over $2 million, and the other has $150,000. If the government decides to lower the Transfer Balance Cap, or introduce a higher tax rate on super balances over $1.6 million, this would adversely impact that couple. But if they had split their superannuation and had more evenly balanced funds, they wouldn't be affected.

Contribution splitting can also result in more favourable Centrelink outcomes. For example, if an older member of a couple has split their superannuation contributions with their younger spouse over an extended period of time, this allows the younger spouse to build up a sizable superannuation balance (and the older one to reduce theirs). As the older member applies for the Age Pension, the younger spouse’s superannuation balance is exempt from means testing until they reach Age Pension age.

Other things for advisers to consider before recommending clients commence splitting super contributions include:

• Not all super funds offer super splitting, and some funds charge a fee for providing this service
• Some funds will only split into accounts within their own fund and will not transfer split contributions to another super fund. This is not an issue with SMSFs
• Clients need to apply to their super fund to split the contributions. The application generally needs to be made during the 12 months after the end of the financial year in which the contributions are made
• If a client has made personal deductible super contributions, they must lodge the appropriate form with the super fund to claim the tax deduction before splitting contributions; and
• Clients cannot split their super contributions if their spouse is aged 65 or over, or if their spouse has reached preservation age and are retired.

There are a number of considerations to be made before a super splitting strategy is adopted. However, financial advisers need to be aware of its merits. The superannuation system will invariably grow and evolve, and if advisers can pre-empt some of this change, it’s a win for both the adviser and their clients.

Anne-Marie Esler, co-founder, Padua Solutions

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.