A short discussion about Contribution Splitting

There is a saying that everything old is new again. I guess that means I'll be 'new again' any day now. That however, is not the reason for this post.

 

A few years ago, there were things called "Reasonable Benefits Limits" or RBL's. These RBL's were the maximum amount of  concessionally taxed super you could access, before paying higher levels of tax. There was a 'lump sum' RBL, and a 'Pension' RBL. For a couple, where one partner made more money than the other over their lifetime, they could reach and exceed their RBL's, while the other partner, was way, way under. The ability to split your contributions, and thereby 'even out' some taxes, was introduced. Contribution Splitting.

 

 

(No, not those splits. They're painful)

 

However, a few years ago, RBL's went by the wayside. The way super was taxed was changed, and RBL's (and contribution splitting apparently), went by the wayside. However, for some people, in some circumstances, superannuation contribution splitting can still lead to strong strategic outcomes.

What contributions can be split?

There are a number of types of contributions that can be split, but the two most common types that may be split are:

·         employer contributions

·         personal deductible contributions

 

How much can be split?

Contributions to taxed superannuation funds that are able to be split are referred to as taxed splitable contributions.

The maximum amount of taxed splitable contributions is the lesser of:

·         85 per cent of the concessional contributions for a financial year, and

·         the concessional contributions cap for the financial year.

 

Benefits of superannuation contribution splitting

Superannuation contribution splitting can result in a number of advantages for a couple, including:

·        where the receiving spouse has little or no superannuation savings of their own, superannuation contribution splitting offers the couple the ability to access two low-rate cap thresholds on lump-sum withdrawals from the taxable component. Where lump-sum withdrawals are made on or after preservation age (55), but prior to age 60, this can effectively double the tax free amount that is able to be withdrawn by the couple as a lump sum to $350,000

·        where contributions are split to a spouse who is under Age/Service Pension age, this may increase pension entitlements as superannuation assets of the younger spouse are not assessed when in accumulation phase while they are under Age/Service Pension age, and

·        a contribution split to an older spouse may allow superannuation benefits to be accessed earlier under a condition of release.

 

Unfortunately, only accumulation funds can offer members the ability to split their contributions. Members of Defined Benefit schemes don’t have this ability. Also, not all funds do offer this benefit to members.

It I important to note that there are eligibility requirements for the receiving spouse of a splitting request, as well as legislation around contribution limits. While there are benefits to the strategy, as always, there are potential traps.

Finally, contribution splitting is of no value (or even interest most likely) to a single person, regardless of their age.  However, for many people, in certain circumstances, it is a very handy tool in the professional planners toolbox.

 

12 Tax Time Steps - Part 2

Recently we briefly discussed 8 super strategies for year end. We now offer a further 4 tax strategies. As with the super ideas, these are general in nature, and professional advice should be sought before looking to implement.

Strategy 9.Use losses to reduce capital gains.
This is suitable if you have some loss making investments that no longer meet your needs. You can save some tax, and free up more funds to invest.

Strategy 10. Defer asset sales to manage CGT.
If you are thinking of selling an asset this financial year, deferring to next financial year can delay when the tax needs to be paid. It may further provide for an opportunity to reduce the CGT as well.

Strategy 11. Pre-pay interest on a investment loan.
If you have a geared investment, you may be able to prepay the interest. This will bring forward the deduction, providing the potential for a reduced income tax liability.

Strategy 12. Pre-pay deductible risk protection premiums.
Similar to the above strategy, pre-paying these premiums will bring forward the deduction. Often people think only of income protection, but for business owners, this may cover more types of policies.

Over the next few weeks, we will look at the practicalities of some of the above strategies.

12 Tax Time Steps - Part 1

Superannuation is still one of the best ways to build wealth and save for retirement. This is primarily because the maximum tax rate during the 'accumulation phase' is 15%. In the lead up to the end of financial year, contributing to super can be even more rewarding.

In part 1 of the 12 tax time steps, we will look at 8 year-end super strategies. In part 2, we will look at a further 4 tax strategies.

Before you implement any of these, make sure you seek financial advice.

Strategy 1. Salary Sacrifice.
Ideal if you are expecting a bonus. The benefits are that you may be able to reduce your tax, and increase the level of after tax investment.

Strategy 2. Get a top up from the Government.
If you qualify, you may be eligible for up to $1,000 from the government, tax free. This also may be an ideal way to pay for insurance premiums (paid for by the government).

Strategy 3. Contribute for your spouse.
If your spouse has a lower income, you may be eligible to contribute, and recieve a tax rebate. This can assist in maximising the benefits of super as a couple.

Strategy 4. Maximise deductible contributions.
If you are eligible, you can pay less tax. This may be an ideal way for a business owner to reduce tax, and create wealth outside of their business.

Strategy 5. Offset capital gains tax.
You may be able to reduce or offset the impact of CGT if you have sold an asset for a profit. While saving tax, you may be able to make a larger after tax investment.

Strategy 6. Split contributions with your spouse.
You may be able to receive your combined super in a more tax effective manner, and even allow yourself to receive concessions on deductible contributions longer if you are eligible to utilise this strategy.

Strategy 7. Purchase Life & TPD tax effectively.
If you are eligible for any of the tax concessions above, you may be able to save on the cost of insurance premiums, or get 'more bang for your buck'.

Strategy 8. Delay withdrawing from super. If you are eligible to withdraw from super, there are some very tax effective reasons to delay, or even postpone withdrawing from super. This can save significant lump sum tax, and allow for a greater after tax investment.

As always, the strategies utlined above are neccessarily general, and my not be suitable for everyone. However, it is likely that any working Australian, and many who are not, can benefit from effective use of super.

In the next few days, we will outline the 4 tax strategies. As ever, if you have any questions, please let us know.