Introduction
Superannuation is one of the most tax-effective ways to save for retirement in Australia. However, many individuals overlook an important strategy that can optimise their retirement savings—contribution splitting. Contribution splitting allows a super fund member to transfer a portion of their concessional (before-tax) contributions to their spouse’s super account. This strategy can be particularly beneficial for couples looking to balance their super balances and maximise tax benefits.
What is Contribution Splitting?
Contribution splitting involves transferring up to 85% of concessional contributions, including employer Superannuation Guarantee (SG) contributions, salary sacrifice contributions, and personal deductible contributions, to a spouse’s super account. This strategy is only available for concessional contributions and cannot be applied to non-concessional contributions.
The transfer occurs in the financial year following the year in which the contribution was made, meaning members must wait until the next financial year to apply for a split.
Benefits of Contribution Splitting
1. Equalising Super Balances
For couples where one partner has a significantly lower super balance, contribution splitting can help distribute retirement savings more evenly. This ensures both partners have adequate funds in retirement and can take advantage of separate tax-free thresholds for withdrawing super.
2. Managing the Transfer Balance Cap
With the Transfer Balance Cap (TBC) limiting the amount that can be transferred to a tax-free retirement income stream ($1.9 million in 2023/24), balancing super balances between partners can help ensure both individuals make full use of their TBC.
3. Accessing Super Earlier
If one spouse is older and nearing their preservation age or retirement, contribution splitting can be used to shift superannuation benefits to the older spouse, allowing earlier access to funds.
4. Tax Efficiency and Estate Planning
By keeping super balances below key tax thresholds, couples can potentially reduce tax on super income streams in retirement and improve estate planning outcomes.
Eligibility and Rules
To qualify for contribution splitting:
- The receiving spouse must be under their preservation age, or between preservation age and 65 and not retired.
- The splitting request must be made in the financial year following the year in which the contributions were made.
- Only concessional contributions (up to 85%) can be split—non-concessional contributions cannot be transferred.
How to Apply for Contribution Splitting
- Check Eligibility – Ensure both spouses meet the eligibility criteria.
- Complete the Application Form – The contributing member must submit a contribution splitting application to their super fund, typically by using an ATO-approved form.
- Fund Assessment and Transfer – The super fund assesses the request and transfers the agreed amount to the receiving spouse’s super account.
Key Considerations
- Not all super funds allow contribution splitting. Members should check with their fund before applying.
- Contribution splitting does not count towards the receiving spouse’s concessional or non-concessional contribution caps.
- If the receiving spouse is close to reaching their total super balance cap, care should be taken to avoid exceeding the limit.
- Contribution splitting cannot be used for contributions made in the same financial year.
Conclusion
Contribution splitting is a valuable yet underutilised strategy that can provide significant financial benefits for couples planning their retirement. Whether the goal is to balance super accounts, maximise tax efficiencies, or plan for early access to superannuation, contribution splitting can play a critical role in achieving long-term financial security. Couples should seek advice from a financial adviser or their super fund to ensure they make the most of this opportunity.