Why couples should try to equalise super

It is common for couples to have very different super balances. If one partner has taken time out to care for children, undertake casual work, or work part-time, the disparity can be pronounced. Super balances will also vary depending on the individual’s age and salary.

But changes implemented by super reforms since 1 July 2017 have brought greater incentives for spouses to consider equalising their superannuation balances, including tax and estate planning benefits.

Some of the major changes
The transfer balance cap limits the total amount of superannuation that can be transferred from the accumulation phase to the tax-free retirement income phase.

This cap starts at $1.6 million per person ($3.2 million combined for a couple). Any excess transfer balance amount must be removed from the retirement phase and will be subject to tax. Equalising super between spouses can therefore maximise the amount that can be invested in the tax-free retirement phase and the amount that can be kept in the tax-friendly super environment if one spouse were to die.

In addition, from July 2018, individuals with a total super balance less than $500,000 are able to carry forward unused concessional contributions (i.e. pre-tax super contributions) and ‘catch them up’ in later years.

This rule also builds an argument for equalising super between spouses, so both can potentially use the catch-up concessional contribution measure to maximise their retirement savings.

How to equalise super between spouses
A number of strategies can be used to equalise super balances between spouses, including regular spouse contributions, contributions splitting and a recontribution strategy.

If a member’s income is below $37,000, their spouse may receive a tax offset of up to $540 if they make a spouse contribution of up to $3,000 to their spouse’s super each year. If the receiving spouse’s income exceeds $37,000, the amount of the tax offset available starts phasing out and cuts out completely at $40,000.

Couples can also consider contributions splitting, which allows one member of a couple to roll over up to 85% of their concessional contributions made in a year to their spouse.

Another option for couples who have reached age 60 is a recontribution strategy. This involves withdrawing some super benefits from the account of the spouse with a higher balance, by starting a transition to retirement income stream or making a lump sum withdrawal (if a condition of release is met) and recontributing to the spouse’s super account.

These withdrawn funds can then be contributed to the spouse’s account either via a spouse contribution or a personal contribution (i.e. the spouse making a member contribution for themselves).

Either way, the contribution counts towards the receiving spouse’s non-concessional contribution cap, which is $100,000 per year, or if the receiving spouse is under 65, the bring-forward cap of up to $300,000 may be available.

These strategies can be a useful way for couples to maximise the amount that can be held in tax-free allocated pensions at retirement, which is $3.2 million in total. For members in the accumulation phase with a total super balance of less than $500,000, they can also help both members of a couple qualify to make catch-up concessional contributions to maximise their super savings in the lead to retirement.

These strategies have been particularly popular with clients who have SMSFs because investments do not need to be sold to action the contribution split, which can be completed using a combination of trustee minutes and accounting records.

The recontribution strategy can also be useful for estate planning purposes, as it potentially reduces the tax payable from death benefit proceeds.

Other considerations
The new catch-up rule for concessional contributions will also increase the flexibility of salary sacrifice arrangements.

For example, if Anne receives $5,000 in employer superannuation contributions and does not make any additional pre-tax contributions, she will have $20,000 of unused concessional contributions left in the 2018-19 tax year. This can then be carried forward for up to five years.

For Australians who have been funnelling income into other areas, like a mortgage, kids’ education or paying off personal debt, this new rule provides a welcome way to add more to super when they can afford to.

Concluding observations
Members of a couple equalising their super balances can bring tax benefits, help with estate planning and boost the retirement nest egg of a partner with minimal retirement savings.

Some couples may be concerned about the impact of equalising super in the event of divorce. As super is considered part of the marital pool of assets, it is a divisible asset under Australian Family Law so there should be little impact.

There are, however, other risks and trade-offs to consider, such as ensuring the various caps are not breached, ensuring that members meet the conditions required for each strategy and weighing up the tax benefits of the strategy against potentially having funds locked up in super for longer.

Given the number of potential strategies on offer and the complexity of some of these, we strongly recommend that anyone who is considering ways to boost their super should contact us for further advice.

If you have any questions/thoughts in relation to this article or would like more information, please click here to send us a brief email.

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