What SMSFs need to know about evening out spousal super
A technical specialist has shed light on the advantages that can come from evening out a couple’s super balance along with strategic factors to consider for the SMSF.
Speaking off the back of International Women’s Day on 8 March, SuperConcepts said it is common knowledge that women will retire from the workforce with substantially less super than their male counterparts. As a result, they find it more difficult to attain financial security in retirement and will often end up having around half of what a male retires on.
With proper planning, SuperConcepts technical executive manager Graeme Colley said it is possible to even out super balances. For SMSFs, the main benefit is that it may allow couples to increase the combined amount they have in super and enable them to maximise contributions and benefits in their fund.
Mr Colley said there are efficient strategies in which the super balances can be evened out for a couple, or to boost the super savings of a single woman in a fund, but there are also different factors for SMSFs to consider in the process.
“The overarching rule with superannuation is that the earlier superannuation savings start, the greater the amount accumulated for retirement due to things like compound earnings and the longer time to accumulate wealth for retirement,” Mr Colley said.
“So, a slow burn in making contributions to super will reap benefits rather than trying to cram super in as near to retirement as possible. The earlier contributions are made to super — a greater proportion of the final benefit will be made up from investment earnings rather than contributions.”
Mr Colley said for those funds where a couple wishes to even out their super balances in respect to concessional and non-concessional contributions, the first thing required is a plan because evening out super balances won’t happen overnight.
“The most useful strategies to even out a couple’s super benefits are spouse splitting concessional contributions and spouse non-concessional contributions,” he said.
“Part-time workers, lower-income earners and women out of the workforce can benefit where couples work together and keep their super account balances growing together — even if one person is on a low income or not working.
“For couples who are at least 65, using the downsizer contribution may help even out super balances.”
Mr Colley said splitting concessional contributions to a spouse is usually made in the year after the contributions have been made to the fund. He noted the concessional contributions could include super guarantee contributions, salary sacrifice contributions or personal concessional contributions.
“The amount transferred to the spouse’s account is limited to 85 per cent of the concessional contributions made by the spouse for a year and limited to the splitting spouse’s concessional contributions cap for the financial year,” he said.
“In an example, Judi’s concessional contributions for the 2020–21 financial year were $25,000 which were made up from her employer’s super guarantee contributions and personal concessional contributions.
“In July 2021, she decides to split all of her concessional contributions to her spouse, Steve, who has a lower super balance. This will allow her to split 85 per cent of her concessional contributions ($21,250) to him during the 2021–22 financial year.”
Judi will need to notify her super fund of the amount she wishes to split on a form, which is available from her fund or the ATO’s website, Mr Collery explained.
That being said, Mr Colley warned there are some other limits on spouse splitting contributions as they can only be split to a spouse who is under 65 and has not retired if they are older than their preservation age (currently 58).
“If the spouse who is splitting the contributions is rolling over, transferring or withdrawing all of their superannuation balance, any splitting application must be made before one of those events has occurred,” he said.
“This may allow the split to take place during the year in which the concessional contributions were made to the fund rather than in the year after they were made.”
For non-concessional contributions considerations, Mr Colley said it can be made for an eligible spouse which is counted against the spouse’s non-concessional contributions cap.
“If the spouse has an adjusted income of less than $37,000, it is possible for the contributing spouse to receive a tax offset of up to 18 per cent on the first $3,000 of the contribution made for their spouse,” he said.
“The tax offset amount phases out between $37,000 and $40,000 on a dollar for dollar basis.
“Until 30 June 2020, it was only possible to make spouse contributions up until age 70. If the spouse was between 65 and 70, a work test of 40 hours in 30 consecutive days was required during the financial year in which the contribution was made.
“However, since 1 July 2020, it was extended to apply up until the spouse reaches 75, providing the work test is met after the spouse is 67. There is no work test to be met for spouse contributions to be made prior to the spouse’s 67th birthday.”