Your Guide to Splitting Up Your Super

Superannuation is a crucial tool for ensuring financial stability and security later in life. However, its implications and benefits extend beyond individual savings, particularly in the context of spousal relationships.

Throughout a de facto or married relationship, there are various opportunities to contribute to a spouse's superannuation—or, at the end of the relationship, a chance to walk away with a portion of it.

Understanding the nuances of spousal superannuation—from contribution splitting to managing superannuation in the event of separation or divorce—can significantly impact retirement outcomes for both partners.

Contribution Splitting: Enhancing Retirement Equity

What is Contribution Splitting?

Contribution splitting allows one partner to transfer a portion of their superannuation contributions to their spouse’s superannuation account. This strategy is particularly beneficial for couples where one partner has a significantly higher income or superannuation balance than the other or where a partner has had to take time off work due to other responsibilities.

Benefits of Contribution Splitting:

1. Boosting Lower Balances: Contribution splitting can help balance superannuation savings between partners, especially if one partner has taken time off work for childcare or other responsibilities, leading to lower superannuation contributions.

2. Tax Efficiency: Contribution splitting can offer tax advantages. By shifting contributions to a partner with a lower income, couples can optimise their overall tax situation, potentially reducing their combined taxable income.

3. Access to Benefits: It can enable earlier access to superannuation benefits. If one partner is older and closer to the preservation age (the age at which superannuation can be accessed), contribution splitting can facilitate earlier access to retirement funds.

How Contribution Splitting Works:

Contribution splitting can be done with concessional (pre-tax) contributions, including employer contributions and salary sacrifice amounts. Up to 85% of these contributions can be split, considering the 15% contributions tax. The process involves completing a Superannuation Contributions Splitting application (NAT 15237) or a similar form provided by your fund and submitting it to the superannuation fund, typically before the end of the financial year following the year the contributions were made.

Tax Offset for Super Contributions on Behalf of Your Spouse

What is the Tax Offset?

You may be able to claim a tax offset of up to $540 per year if you make a super contribution on behalf of your spouse (married or de facto) and their income is below $40,000. Any contributions you make to your spouse’s super are treated as their non-concessional contributions, whether or not you’re eligible for the super tax offset.

Eligibility Conditions:

1. General Conditions:

• Contribution must be to a complying super fund or approved RSA.
• Both you and your spouse must be Australian residents when the contribution is made.
• Contribution is not deductible by you.
• You and your spouse must not be living separately and apart permanently.

2. Specific Conditions:

• Spouse’s income is less than $40,000 in the income year, including assessable income, reportable fringe benefits, and employer super contributions.
• Spouse did not exceed the non-concessional contributions cap in the income year.
• Spouse’s total super balance is less than the general transfer balance cap before the income year starts.
• For 2020-21 and later, spouse is under 75 years old when contributions are made.
• For years before 2020-21, spouse is under 70 years old when contributions are made.

Calculating the Offset Amount:

The tax offset reduces when your spouse’s income exceeds $37,000 and phases out completely at $40,000. The tax offset is 18% of the lesser of:

- $3,000 minus the amount by which your spouse’s income exceeds $37,000.

- The total spouse contributions made in the income year.

The tax offset cannot be claimed for contributions made to your own fund that are then split to your spouse (these are considered rollovers or transfers, not contributions).

What About Superannuation in Separation and Divorce?

Superannuation as a Marital Asset:

Superannuation is treated as a marital asset and is subject to division in the event of separation or divorce. This ensures that both parties receive a fair share of the combined superannuation assets accumulated during the relationship.

Superannuation Splitting:

Superannuation splitting in divorce involves dividing the superannuation benefits between the parties. This can be done through a formal agreement, either by mutual consent or through a court order. The process involves several steps:

1. Valuation: The superannuation accounts of both parties are valued to determine the total amount to be split. This valuation must be performed by a professional to ensure accuracy.
2. Agreement or Order: Couples can decide how to split their superannuation or seek a court order if an agreement cannot be reached. The Family Court considers various factors, including the relationship duration, contributions made by each partner, and future needs when determining the split amount.
3. Implementation: Once the split amount is determined, the superannuation funds are instructed to transfer the agreed amount from one partner’s account to the other’s. This process is carefully regulated to ensure compliance with legal requirements.

Challenges and Considerations:

1. Complex Valuations: Accurately valuing superannuation can be complex, especially for defined benefit schemes or self-managed superannuation funds (SMSFs). Expert advice is often necessary to navigate these complexities.
2. Future Contributions: Post-separation contributions and earnings on superannuation can further complicate the division process. Clear documentation and legal guidance are essential to address these issues.
3. Preservation Rules: Superannuation is typically preserved until retirement age, meaning it cannot be accessed immediately even after a split. This can impact the immediate financial needs of the separated parties.

Have a Strategy

Spousal superannuation strategies—from contribution splitting to managing superannuation during separation—play a critical role in ensuring equitable retirement outcomes.

Contribution splitting can help balance retirement savings between partners, providing financial benefits and enhancing overall retirement security. Meanwhile, understanding the legal and procedural aspects of superannuation splitting during separation or divorce is essential for a fair and effective distribution of assets.

By navigating these aspects thoughtfully and with appropriate professional guidance, couples can make informed decisions that benefit both partners in the long term, ensuring financial stability and security in their retirement years.

For the best accounting, business and tax advice contact David and the team from ABTAC Accounting today ?? (07) 5610 1945, or visit our website.

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