CHANGES TO CONTRIBUTIONS SPLITTING FOR UNDEDUCTED CONTRIBUTIONS

This is an extract from our training tool for accountants and financial planners. We thought we would transfer it across as written, rathe than edit it for the blog.

Changes to Undeducted Contributions Splitting

If you or your clients were looking to split un-taxed contributions, but have not yet made the contributions, then you need to think again. On the 2nd of April, the ATO announced that undeducted contributions made after that date could not be split with a spouse. If a split is attempted, the contributions will be taxed at 15% in the account of the recipient spouse.

Superannuation splitting was of course introduced to allow couples to jointly accumulate superannuation in excess of the better-superannuated partners RBL. That is, in situations where one member of a couple had benefits that were approaching or had exceeded that member’s RBL, there was little incentive for a couple to continue to use superannuation. To reinstate this incentive, couples were allowed to split benefits back to the less-superannuated member.

Most typically, this was the wife, who had typically spent fewer years in paid work, and typically was paid less than her husband.

The May 2006 Superannuation Revolution abolished RBLs as of the 30 June 2007. Therefore, this original rationale for superannuation splitting no longer exists. It was first thought that superannuation splitting would not be used to any great extent following these changes, until someone realised that, in cases where the two members of a couple are not the same age, splitting contributions to the older member of the couple meant that the contributions will move into the ‘post-60 tax abyss’ sooner. At the age of 60, withdrawals from superannuation become tax free. Of perhaps greater incentive for couples is the fact that the superannuation fund itself can bcome a tax free entity if a pension is commenced. Therefore, younger members of a superannuation fund currently have an incentive to split contributions to their older partner, allowing the benefits to enter the tax free period sooner.

This is the case even where the older partner already has a larger amount of benefits than the younger partner. Some wags have reasoned that this will increase the marriage prospects of older Australians.

The change is seemingly intended to limit the extent to which superannuation splitting is used merely to bring forward the time at which tax is no longer payable within the fund. The change has not been widely publicized (it is difficult to find any reference to it on the ATO website, for example), but a number of financial service providers have announced it.

This is a case of checking first with the ATO before moving undeducted contributions into a superannuation fund, especially if the younger spouse is well below 60. It could be a long wait to get their hands on the money again – and that might not have been their plan.

Adrian McMaster