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How couples can overcome super’s $1.6m contribution limit

Anthony Fensom  |  16 Oct 2019Text size  Decrease  Increase  |  
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Sharing is caring and that is definitely the case with super balances.

The July 2017 introduction of a $1.6 million transfer balance cap may have stymied some super strategies. However, experts suggest couples, including those with self-managed super funds can overcome this potential obstacle through contribution splitting.

For example, if one partner (whether spouse, de facto or same sex) is set to exceed the $1.6 million cap, he or she can top up the other partner’s super balance, allowing the couple to enjoy as much as $3.2 million in tax-free retirement income.

To be eligible, the partner receiving the contributions must be under their preservation age (the age at which super can be legally accessed) or between their preservation age and 65 but not retired, explains Brad Hoffman, associate principal at Virtu Super.

If the partner providing the contribution is under 65 and not retired, he or she can nominate to split up to 85 per cent of concessional contributions made during a year (to a maximum of $25,000) to the other partner’s super account.

This is done by notifying their super fund of their intention to conduct the contribution split before the end of the following financial year in which the contributions were made. So if the contributions were made in fiscal 2020, they would notify their fund of the split prior to 30 June 2021.

However, the contributor does not get any extra concessional contribution limits from splitting. For example, if a person makes $25,000 worth of contributions in a financial year and splits $10,000 to their spouse, they could not make an extra $10,000 of concessional contributions during the year.

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The strategy is particularly beneficial for SMSFs given their flexibility, since some APRA-regulated funds reportedly charge fees or may not allow contribution splitting.

SMSFs also do not need to sell investments to action the contribution split since it is simply a matter of making accounting entries after lodging a nomination with the fund’s trustee, rather than any physical separation of assets or cash.

Pros & cons

“The advantages of the strategy are that it enables member balances to build more evenly over time,” Hoffman says. “The benefits are really limited to those who might one day come close to the $1.6 million total superannuation balance limit, so it is really a strategy which will only benefit high net wealth clients.

“For example, a person who contributes the entire $25,000 concessional contribution each and every year into a fund which earns 7 per cent a year would take almost 30 years to reach the $1.6 million threshold. So, it’s not for everyone, but it can assist certain clients who you suspect will reach their threshold in the foreseeable future.”

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If one partner is much younger than the other it could take a long time before the benefits are accessed, depending on when they reach preservation age and retire or reach 65 years.

There is also some evidence that the strategy is helping to reduce the gender gap, which has shrunk from 22 per cent in 2013 to 18 per cent in 2017.

Class Super estimates the gap further contracted to 17 per cent last year, with SMSFs likely closing the gap faster than APRA-regulated funds.

However, if one partner is much younger than the other it could take a long time before the benefits are accessed, depending on when they reach preservation age and retire or reach 65 years.

“In practice, it is rarely used for or useful to the average couple, so its utility as a means to reduce the gender superannuation gap is greatly overstated,” Hoffman says.

“It is more frequently used as a tool to assist high net worth couples to delay the point at which one or both of them reach their $1.6 million total superannuation balance.”

Other methods

Other options for boosting a partner’s super balance include making an after-tax, non-concessional contribution, if they are earning less than $40,000 a year. For amounts of up to $3000, there is a tax offset of up to 18 per cent, or $540 for the contributor’s personal tax return.

Another method is making a “catch-up” contribution. From 1 July 2018, any part of an individual’s annual $25,000 concessional contribution limit which is not used can be carried forward to the next year. It is possible to accrue up to five years’ worth of unused limits.

However, there are some limitations to this strategy.

“Firstly, it is only available for individuals with balances of under $500,000. Secondly, while the contributor will be entitled to a tax deduction for the contribution, it will be taxed at 15 per cent in the super fund, so the person would need to have sufficient taxable income to make the contribution worthwhile,” Hoffman says.

“For example, the first $18,000 a person earns is tax-free, with amounts over this taxed at 19 per cent, so it would not make sense to contribute so much that it would reduce income below $18,000.”

There is also the option of making a non-concessional contribution, according to Liam Shorte, director at Verante Financial Planning.

“If the older spouse or partner retires before age 65 or is still working after 65 but the younger spouse is under 65, then you could look at drawing down a tax-free lump sum from the larger member’s account after age 60 and do a recontribution in to the younger and/or lower earning partner’s account as a non-concessional contribution,” Shorte says.

“This allows the tax-free transfer of up to $100,000 per year or $300,000 in one year using the bring-forward provisions while the younger spouse is aged under 65.”

For couples, the prospect of maximising combined tax-free super balances at retirement provides a powerful incentive to consider such strategies, depending on individual circumstances and subject to professional advice.


is a Morningstar contributor.

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