The most common way of building your superannuation is through employer mandated contributions or superannuation guarantee charge (SGC). Therefore it is not uncommon for couples to have large disparity in their superannuation balances where one partner has continuously worked and the other has taken time from the workforce to care for children; or has worked in industries that are more casual or part-time vocations. The difference will also widen with couples with different earning potential and a wider age gap.
Historically, this disparity has not been a major issue. However the 2017 super reforms have introduced a variety of measures that are dependent on your personal Total Superannuation Balance (TSB). By equalizing the balances between the couple, there is the potential to unlock some tax and estate planning opportunities.
Transfer Balance Cap (TBC)
The transfer balance cap (currently $1.6M per member), is the limit to the amount of super that can be transferred to commence a tax-free pension. Any excess above this transfer balance cap needs to remain in accumulation phase and therefore be taxed at 15%.
This means without re-balancing; one partner may pay tax in retirement despite their spouse being under the cap.
Therefore with proper planning you and your spouse combined could transfer $3.2M into a tax free pension at retirement.
Total Superannuation Balance – Non-concessional contributions
If a person’s total superannuation balance is $1.6M or more, the non-concessional contribution cap is zero.
This means that without re-balancing your combined ability to get monies; from the sale of a business, sale of a home, or an inheritance, into superannuation is dramatically reduced as contributions are limited to only one member. This could result in substantial assets being taxed at potentially higher marginal tax rates when compared to superannuation’s lower rate.
Carried Forward Unused Concessional Contributions
Carried forward unused concessional contributions; commonly referred to as catch up contributions, mean that from July 2018, individuals with a total super balance less than $500,000 can carry forward any unused concessional contributions and catch them up within the next 5 years.
Therefore, appropriate rebalancing can offer an opportunity to add more tax effective superannuation when the couple can afford it or when they come into additional monies.
How to Equalise the Superannuation Balance between couple?
Three strategies can be used to equalise super balances between a couple:
- Contribution Splitting
- Spouse Contributions
- Re-contribution Strategies
Strategy 1. Contribution Splitting
Contribution splitting is an option that allows both partners to keep their account balances growing by transferring part of the highest income earner’s concessional contributions (up to 85%) to the lower earner’s super account each financial year.
Strategy 2. Spouse Contributions
A Partner can receive a tax offset of up to $540 if their spouse’s income is below $37,000 & they contribute up to $3,000 for their spouse. This offset cuts out if the spouse’s income exceeds $40,000.
Strategy 3. Re-contribution Strategy
Upon meeting a condition of release a partner could withdraw additional super benefits and the spouse could then recontribute the additional monies into their super account either as a concessional or non-concessional contribution.
This strategy also has the added benefit if re-contributed via non-concessional contributions of reducing the tax payable on death benefits to adult children.
A key factor to consider is the age of the receiving spouse as any monies transferred to their account will be subject to their conditions of release. Therefore if the receiving spouse is a lot younger any benefits transferred to them will be locked away longer.
Another is the implication of additional superannuation on any Centrelink benefits being received. Eligibility for the Age Pension or other benefits can be impacted by your superannuation balance and this therefore needs to be factored in to the decision as equalizing could have negative impacts and therefore is not always suitable.
Super Balance Equalization can offer significant benefits however it is a complex strategy and we recommend that anyone who is considering any financial strategies seek financial advice. If you’re in need of advice, please contact Scott Coghlan from Walsh SMSF Division
This article is for general information only and readers should seek professional advice on their personal circumstances before taking action.