What is SMSF contribution splitting?
Contribution splitting involves reallocating pre-tax contributions (such as employer Super Guarantee contributions, salary sacrificed amounts, or personal deductible contributions) to a spouse's super account.
The split is treated as a rollover, it does not reduce the contributions originally made for the transferring member for reporting and contribution caps purposes.
Contributions are able to be split once per year (after the previous financial year closes) any time up to the end of the following financial year.
Each financial year a member can split up to 85% of their concessional super contributions. This is because the ATO operates under the assumption that the contribution will form part of the SMSF’s (self managed super funds) assessable income and will therefore be taxed at 15%.
The 5-year unused concessional contributions rule
Given that the carry forward rules increase a member’s concessional cap, members are able to split 85% of that higher concessional contribution cap.
For example, a member with an unused concessional cap of $40,000 due to the carry forward rules could split 85% of the $40,000, which would be $34,000.
Why would I split my super contributions?
The short answer is, to increase the super balance of the transferring member’s spouse.
Some of the benefits are:
Earlier access to tax-free super benefits: This allows earlier access to, and the potential to withdraw super funds tax-free, which is particularly advantageous when one spouse is older than the other.
Enhanced Centrelink or age pension benefits: The advantage of this may be to improve one's pension entitlements by not counting the younger spouse's super in asset tests.
Managing total super balance limits and transfer balance cap: This helps to evenly distribute super balances. Which allows both partners to maximise their contributions and maintain more wealth in their tax-free retirement phase.
Insurance Premiums: Where the spouse’s member balance is not sufficient to meet the cost of their insurance premiums, the transferring member can split their contributions to assist in covering the insurance premiums.
Estate planning: Ensures financial readiness in case of an unexpected event such as the loss of a spouse.
Suppressing members’ super balances: This helps keep super balances below super eligibility thresholds. For example, it may allow access to the 5-year unused concessional contribution entitlement by keeping, or lowering, their total super balance to below the $500k threshold.
Conditions that need to be met to split contributions
To begin with, it’s important to confirm that the SMSF’s trust deed allows for splitting super contributions. If it does, you’re good to get started.
When splitting super contributions, a spouse is defined as someone a member is legally married to, are in a registered relationship with, or live with in a genuine de facto relationship.
Both members be Australian residents when the contribution is made.
The receiving spouse must not have exceeded their before-tax contributions cap for that financial year.
The receiving spouse’s total super balance must be under the cap in the financial year prior to the one in which the contribution is made ($1.9 million for 2023/24).
The transferring member can apply at any time however their spouse must be under preservation age. If they’re over preservation age, they must be under 64 and not retired in order to accept contributions.
Note: Contribution splitting does not affect the transferring member’s concessional contributions cap. The transferring member can make a non-concessional spouse contribution directly to their spouse’s super fund. There is no limit to the amount of spouse super contributions that can be made, providing the amount is under their non-concessional contributions cap.
How can ABA Advice Beyond Accounting help you?
The team at ABA Advice Beyond Accounting are experts in managing SMSFs. Our SMSF specialist will provide consistent and detailed support when you partner with us so that you can improve your future financial position with clear advice, proven strategies, as well as benefit from our superannuation management services.
We always start with understanding your unique situation and long-term goals. Before assisting you with the administration and management of your SMSF. This includes maintaining accounting and member records for you, as well as preparing annual financial statements and pension fund paperwork. Ensuring your portfolio records remain in good order.
Many of our clients choose to work with us because we reduce the stress involved in managing their SMSFs. In addition, we will ensure that your fund is ATO compliant and most importantly, that your fund delivers growth on your investment.
Would you like to improve your financial future? Then contact us to speak to our SMSF specialists today.
Important note on SMSF Investment Advice
ABA Advice Beyond Accounting are not financial advisers and cannot offer financial or investment advice on your SMSF investments. ABA always recommend you seek investment advice from a licensed Financial Adviser and would be happy to recommend a financial adviser if you do not already have one.