‘The devil is in the detail’: What to remember when combining contribution splitting and reserving strategies

In the latest technical update, SuperConcepts technical specialist Anthony Cullen said that given there was no limit on how much you could start a pension with, there was little incentive to split balances to spouses. 

“But while these strategies still hold true today, since 1 July 2017, limitations associated with TBC and TSB have created further reasons to look at the splitting strategies,” Mr Cullen said.

However, he noted SMSFs must be aware of certain complexities that may increase the risk of strategies not working out when combining contributions splitting with the reserving method.

It is known that the rules associated with contribution splitting can be found in Division 6.7 of the Superannuation Industry (Supervision) Regulations 1994 (SISR). 

The definition of “taxed splittable contribution” can be found in r6.41, which further creates a link with the 1997 Income Tax Assessment Act (ITAA), Mr Cullen explained. Section 295-160 of the ITAA requires concessional contributions to be included in the assessable income of a super fund, in the year in which they are made.

But while this is generally well known, Mr Cullen said it begins to get interesting when it comes to reserving strategies, as it’s accepted the deduction to the contributor and the assessable income of the fund are accounted for in the year in which the contribution is made (in the month of June).

“The key to the strategy is not allocating the contribution until the next financial year (no later than 28 July),” he said.

“If we return to the SISR, r6.44 tells us that the amount that can be split is based on the splittable contributions made to that fund by, for, or on behalf of the member in the last financial year that ended before the application; or the financial year in which the application is made — where the member’s entire benefit is to be rolled over, transferred or cashed in that year.

“This all points to the fact that we need to consider the actual contributions to the fund in any given year when determining the splittable amount, and not the amount that has been allocated to the member in that year.”

Considering timing for concessional contributions

In more recent times, it’s not just the interaction between splitting and contribution reserving that needs to be considered, according to Mr Cullen. From 1 July 2018 onwards, members are able to accrue unused concessional contributions and carry them over to future years, for up to five years. 

Mr Cullen said whether a member can access them and make larger contributions will be dependent on their TSB in those future years.

“Let’s consider Franklin; he is 54 and as at 30 June 2020 has a TSB of $400,000. Taking advantage of the current year cap as well as fully utilising his unused caps for prior years, he makes a personal concessional contribution to his SMSF of $40,000 in the 2021 financial year,” he said.

“Franklin will be looking to split what he can to Elisa in the 2022 financial year. When considering the maximum splittable amount, his personal cap for the 2021 financial year includes the rolled forward unused portions from prior years. As such, in accordance with r6.40, he can split the lesser of 85 per cent of the contributions made — i.e. $40,000 x his % = $34,000 — and his cap for the year, i.e. $40,000.

“If a member is unable to utilise the catch-up provisions due to their TSB exceeding the threshold, their cap will remain at the general concessional cap.”

When it comes to the timing of the split, in accordance with r6.44, the majority of splitting transactions occur in the year after the contributions are made, Mr Cullen noted.

However, this would mean there are provisions to allow for a split in the year in which the contributions are made — where the member’s entire benefit is to be rolled over, transferred (i.e. to commence a pension) or cashed in that year. 

“We have seen situations where members have made contributions to an APRA fund, then set up an SMSF and rolled their benefits over, before attending to the split,” Mr Cullen said.

“Unfortunately, the application to split cannot be made to the SMSF, as the contributions were not made to that fund, nor are they counted towards the assessable income of that fund. In these circumstances, the application to split should be made to the APRA fund prior to the transfer request.

“If we concentrate on the more common split in the subsequent year, when should we split Franklin’s contribution to Elisa in their SMSF? 

“I’ve heard many arguments suggesting it is practical to process it on 1 July. Common arguments are along the lines of: ‘It’s a fresh year and it’s an easy process to account for at the [beginning] of the year’, ‘it increases Elisa’s balance early and she can then benefit from an increase in allocation of earnings’, ‘the split needs to occur early to cover Elisa’s pending insurance premium payment’.”

Mr Cullen said the concern with such arguments, regardless of how compelling they may seem, is what is the trigger that enables the split to be considered in the first place?

“Franklin must request the trustees to split his contributions to Elisa. The split cannot happen prior to the request. When was the request form completed, dated and supplied to the trustees?” he said.

“In addition to this, Franklin cannot split non-concessional contributions. Given he made personal contributions, he will need to supply the trustees with a notice of intent to claim a deduction for the trustees to classify his contributions as concessional.

“As with my question in relation to the splitting request: when was the notice form completed, dated and supplied to the trustees? Prior to this, how do the trustees know they have valid concessional contributions to split?

“The idea of splitting seems an easy concept to understand. But, like many laws and rules, we need to consider the devil in the detail. As highlighted above, ever-evolving laws in other areas of contributions have flow-on effects to splitting that need to be considered.”