Issue 08 - SMSF Wealth Newsletter - May 2017
Superannuation contribution splitting is a process that allows spouses to divide contributions between two individual superannuation accounts, rather than being 'stuck' in the account of the person who earned the money.
Contribution splitting was originally intended to allow spouses to 'even up' their account balances to enable them to take advantage of tax concessions and improve Age Pension eligibility.
Splitting is particularly relevant to people who might be out of the workforce for a number of years or who have not worked at all, for example, mum or dad staying at home to raise the kids for a number of years resulting in one spouse having a larger balance than the other.
The contribution to be split cannot be made directly to the spouse's account. To be split successfully, the concessional contribution must first be made to the member's superannuation fund account, at which stage 15% tax will be deducted by the fund. Up to 85% of the concessional contributions, that is the remaining balance after tax is deducted, can then be split to your spouse.
Concessional contributions include employer Superannuation Guarantee amounts, salary sacrifice, any additional contributions made by an employer as well as personal contributions that you claim a tax deduction for.
The split contributions will still count towards the initial contributing member's caps, not the receiving spouse's caps.
It is generally only possible to split a superannuation contribution in the financial year immediately after the year in which the contributions were made. For the contributions made this financial year, an application to split has to be made to the member's fund in the next financial year.
The exceptions to that are if there is going to be a rollover of funds or if a pension is going to be started. In that case, the split may occur at the time of the rollover or when commencing the pension during the financial year.
The application must indicate the amount to be directed to the spouse's superannuation account and must be sent to, received and acknowledged by the member's superannuation fund prior to the end of the financial year. If you miss the 30 June cut-off then that opportunity is lost.
There are also age restrictions when splitting contributions. The spouse receiving the split contribution must be under preservation age and cannot be retired.
There are numerous benefits that couples can obtain from contribution splitting. Some advantages that arise include:
- Taking advantage of the low-rate tax threshold if a couple is planning to retire prior to age 60, they will both receive a $200,000 taxable component tax free.
- Providing superannuation benefits earlier by splitting contributions with the older spouse.
- Potentially improving an older spouse's Centrelink position by splitting contributions to the younger spouse.
- Taking advantage of the tax free status of earnings in pension phase by splitting contributions with the older spouse.
Contribution splitting strategies have the potential to help clients by reducing the retirement savings gap between spouses. In addition, there can be Centrelink and tax benefits for both the older spouse and those considering early retirement. However, you must understand that such strategies require a long term commitment from each spouse.
- Providing a means of remaining within the proposed $1.6 million lifetime pension cap, which will potentially make contribution splitting more attractive to wealthier members.
Contribution splitting is subject to the rules of individual superannuation funds and it is not compulsory for superannuation funds to offer spouse contribution splitting. Consequently, you need to determine whether your superannuation fund offers the option of splitting if you are considering this process.
Please contact your Brentnalls advisor if you wish to look into the benefits of contribution splitting to your spouse.
ATO statistics suggest that most self-managed superannuation funds (SMSFs) have individual trustees. This is troubling as sole-purpose corporate SMSF trustees have been known to be superior for many years.
Why are they superior?
For a start, the "sole-purpose" indicates that the company only acts in one capacity – as an SMSF trustee.
Other key advantages include:
- A corporate trustee cannot die and offers better continuous succession. On the other hand, if individual trustees change or one dies, administrative hassles can result (such as having to update ownership documents). If real estate is involved, it is up to the trustee to show that no taxes should be payable as a result of the change of trustee. This can involve submitting substantial paperwork.
- When adding a person to the trustee role, this is usually less work-intensive for a corporate trustee. For individual trustees, adding one or more persons to the trustee role constitutes a change of trustee. On the other hand, in the case of a corporate trustee, adding directors to a company does not technically change the trustee itself since the trustee is the company. Because of this technicality, it is usually less troublesome to add directors to a company than to add individual trustees.
- Corporate trustees can help a fund stay within the requirements of being an SMSF, which broadly helps the fund stay complying in the ATO's books. In particular, in the case of a single-member fund with two individual trustees, if one dies, the fund cannot remain an SMSF with only one trustee and one member. But because of a quirk in the legislation, a corporate trustee with one director, with a single-member fund, can still meet the SMSF definition.
- If an SMSF with individual trustees tries to engage in limited recourse borrowing with a bank lender, the bank will usually insist on a corporate trustee. If this occurs part way through the process, it can be an obstacle to the loan's progression.
- Sole-purpose corporate trustees offer greater asset protection for an SMSF at risk, or in debt. If an SMSF trustee is sued and a large debt results, for example, individual trustees have their personal assets at stake if the SMSF assets are insufficient. By contrast, a corporate trustee is a separate legal entity, offering better protection.
- The ATO has noted that contraventions of the "separation of assets" rule is common. The relevant law states (in part) that a trustee must keep its money and assets separate from money and assets "held by the trustee personally". Having a sole-purpose corporate trustee generally prevents this contravention from occurring because of the separation of entities, and because the trustee will not have any personal money (it will only have SMSF money). On the other hand, if an SMSF with individual trustees mingles SMSF money with the members' personal money, this is a contravention.
- The SMSF administrative penalty rules allow the ATO to impose administrative penalties on SMSF trustees for the contravention of certain superannuation rules. Directors of corporate trustees are jointly and severally liable to the penalty. Individual trustees are liable to one penalty each. So having a corporate trustee instead of individuals can mean fewer penalties.
- There are highly technical rules for SMSF residency that broadly require an SMSF to meet the "Australian superannuation fund" definition to retain tax concessions. Under these technical rules, it is usually easier to show that the central management and control of a corporate trustee remains in Australia.
While it can be possible for a company to wear "more than one hat" (operate as an SMSF trustee and a discretionary trust trustee), this can create confusion and lead to mistakes. There have been several instances where a company has stopped being used in one capacity, leading to its formal deregistration, with all parties having forgotten that it is also used as an SMSF trustee. Accidents like this can lead to serious problems. Accordingly, this is another reason that a sole-purpose corporate trustee is ideal.
For SMSFs implementing a sole-purpose corporate trustee, a concessional annual ASIC fee can apply (the discount is about 80 per cent compared to the normal proprietary company annual fee).
However, company directors must be wary of the special eligibility requirements. First, it must be that the sole purpose of the company is to act as the trustee of a regulated superannuation fund. Second, the constitution of the company must prohibit distribution of the company's income or property to its members. Accordingly, it is not the case that "any old constitution" is suitable.