Contribution splitting needs long-term planning: experts

“If you think about TBCs and how much members might be able to transfer to their retirement phase when they get to that age, if you've got a couple where one is getting close to their TBC and the other one is not, you might look at some of those contributions from the higher-balance member to the lower-balance member in order to keep both of them below the cap limits,” Mr Cullen said.

He said contribution splitting is a beneficial couple retirement strategy that can be used to maximise Centrelink payments, as well as offer the ability to access money sooner and afford insurance policies for both, rather than just an individual.

However, Mr Cullen said contribution splitting is not a short-term strategy but should be considered over the long term to help build retirement income.

“It’s not something you think about at the last minute. If you use it as a long-term strategy, and split contributions with your spouse over years, by the time you get to retirement, hopefully, both of you will delay that gap and can both fully utilise putting your balances into retirement phase benefits.”

Tim Miller, head of education for Smarter SMSF, added contribution splitting is a strategy where one spouse can split up to 85 per cent of their assessable (concessional) contributions made during the financial year to their spouse.

There are regulations in that the spouse must be under preservation age, or between preservation age and 65 but not have declared retirement, meaning they can't have met a condition of release with a nil cashing restriction.

“In most instances, the application to split the contribution is made in the year following the year the contribution is made although an exception applies if the member is paying out their benefit,” Mr Miller said.

“So if a member is about to start a pension with their balance they can make the application in the same year prior to the pension commencing, same if a rollover is going to occur. The maximum amount that can be split is the lesser of 85 per cent of the concessional contributions made or the member's concessional contribution cap – you can't split non-concessional and other non-assessable contributions.”

Mr Miller added in a normal set of circumstances the SMSF will go about its usual end-of-year processing in reconciling transactions and identifying whether contributions are concessional or non-concessional or otherwise.

“Following the end of the year, once all contributions are known and reported the member will then make an application to the fund to split the contribution using an ATO form and then the SMSF trustees will prepare a rollover form to roll the money from one spouse to the other,” he said.

“The amount is rolled over like any other rollover and the amount is 100 per cent preserved and 100 per cent taxable component. The contribution counts against the cap for the spouse who it is originally intended for in the year it is received. It doesn't count against the cap of the spouse to whom it is transferred.”

Mr Miller said in an SMSF-to-SMSF splitting strategy the primary goal is to make sure that the initial contribution goes in before the end of the year to ensure the process isn't delayed by a year.

“Beyond that, the members have the entire following year to do the split so timing isn't critical. For an APRA fund to SMSF, there will need to be a consideration as to whether the APRA fund will allow the application.”

He concluded that contribution splitting has its biggest impact on two strategies – the first home super saver scheme and carrying forward unused concessional contributions.

Mr Cullen said as the limit is 85 per cent of concessional contributions or the cap it means those with less than $500,000 total superannuation balance will have a higher cap if they haven't maxed out their contributions.

“As such they will be able to contribute more, potentially increasing their ability to claim a deduction and subsequently their ability to split more to their spouse,” he said.