Introduction
Superannuation contribution splitting allows members of a couple to transfer concessional super contributions from one spouse to another. Introduced in 2003, this strategy provides flexibility in managing retirement savings, particularly in cases where there is a significant disparity in superannuation balances or differences in retirement ages.
Unlike splitting superannuation balances, which typically only occurs in family law settlements, contribution splitting is about proactively redistributing contributions as part of long-term financial planning.
Benefits of Contribution Splitting
Contribution splitting can offer several strategic advantages, including:
- Maximising tax-free super withdrawals – By splitting contributions to an older spouse, funds can be accessed earlier without tax implications.
- Managing the Pension Transfer Balance Cap (TBC) – Spreading super balances more evenly between spouses helps maximise the amount that can be transferred into a tax-free pension phase.
- Reducing Total Superannuation Balance (TSB) for one spouse – This can assist in maintaining eligibility for non-concessional contributions.
- Social security benefits – Sheltering superannuation assets in the younger spouse’s account can help improve eligibility for social security entitlements.
- Funding insurance premiums – Contribution splitting can be used to cover life, total and permanent disability (TPD), and income protection insurance premiums for a lower-income spouse.
Taxation of Lump Sum Super Withdrawals
A key advantage of contribution splitting is the ability to structure super balances to maximise tax-free withdrawals. For example, a younger spouse can split contributions to an older spouse who may reach preservation age sooner and be able to withdraw lump sums tax-free once they turn 60. Additionally, where both spouses are over preservation age but under 60, they can double the amount of tax-free withdrawals by each utilising their low-rate cap ($235,000 per individual in the 2023-24 financial year).
Eligibility for Contribution Splitting
To qualify for contribution splitting:
- The contributing spouse must be eligible to make concessional contributions.
- The receiving spouse must be either:
- Under preservation age, or
- Between preservation age and 65 years old and not yet retired.
- Contributions can only be split in the financial year following the year they were made (unless the contributing spouse is withdrawing their entire super balance).
What Contributions Can Be Split?
Only concessional (before-tax) contributions can be split, including:
- Superannuation Guarantee (SG) contributions
- Salary sacrifice contributions
- Personal deductible contributions
- Certain employer contributions
What Contributions Cannot Be Split?
The following contributions are ineligible for splitting:
- Non-concessional (after-tax) contributions
- Contributions made under the small business CGT cap
- Government co-contributions
- Downsizer contributions
- Rollovers from another superannuation fund
How Much Can Be Split?
The maximum amount that can be split is the lesser of:
- 85% of the concessional contributions for that financial year, or
- The concessional contributions cap ($27,500 for the 2023-24 financial year)
The Contribution Splitting Process
- Confirm fund eligibility – Some super funds do not offer contribution splitting, so it is important to check.
- Make concessional contributions – Contributions must be made in one financial year before they can be split in the next.
- Submit a splitting application – A formal application must be lodged with the super fund, typically using the ATO’s Superannuation Contributions Splitting Application form.
- Fund processes the request – The trustee of the super fund must process the request within 30 days if valid.
Case Study: Using Contribution Splitting to Optimise Retirement Savings
John and Mary’s Contribution Splitting Strategy
John, aged 50, makes a $10,000 personal deductible contribution to his super fund. He decides to split 85% ($8,500) of this contribution with his wife Mary, aged 57, who will reach 60 in three years. By doing so, Mary can access these funds tax-free sooner, instead of waiting 10 years for John to reach his preservation age.
Additionally, John’s superannuation contributions remain within his concessional cap, and Mary’s balance grows, helping them to manage their transfer balance caps more effectively.
Final Thoughts
Contribution splitting is a powerful but often underutilised strategy for optimising superannuation balances. By carefully planning contributions, couples can enhance their retirement savings, improve tax efficiency, and potentially maximise social security benefits. However, as superannuation rules are complex, seeking professional financial advice is crucial before implementing this strategy.