Splitting super with your spouse
DESPITE the changes to superannuation, in some circumstances, it may be worthwhile to split your super with your spouse.
It works like this. Once a year you can instruct your fund to transfer, to your spouse, up to 100% of your superannuation contributions made in that year. Both undeducted and deductible contributions can be transferred, but the 15% contributions tax on the concessional (deductible) contributions will have to be taken into account when the transfer is made. This effectively limits the amount of concessional contributions that can be split to 85%.
Think about Peter, aged 52. He earns $125,000 a year and is contributing $50,000 a year to superannuation due to a combination of the compulsory employer superannuation and his own voluntary sacrificed contributions.
He already has over $600,000 in superannuation but his wife Clare, who does not work, has none. His deductible contribution of $50,000 will still be liable for the 15 per cent contributions tax but he can ask his fund to put $42,500 of it into her superannuation account. If he keeps up this strategy until he is 65 she may well have over $900,000 in her own superannuation account then if her fund earned 9% per annum.
Super splitting doesn’t get Peter out of the 15% contributions tax but it still has advantages. First it enables them to maximise the amount that can be withdrawn tax free if Clare wants to make withdrawals before age 60 – remember withdrawals are only tax free for those aged 60 or more. Those aged between 55 and 60 can withdraw the first $150,000 of the taxable component tax free but, for them, the exit tax of 16.5% remains on the balance. If deemed appropriate, he could even work until age 75 and keep up the salary sacrifice/spouse split strategy going. This would keep him in a lower marginal tax bracket while funding a major part of the household expenses through tax free withdrawals from her super.
The strategy can be especially useful if there is a significant age difference. If Clare was older than Peter she would reach age 55 or 60 before him and so be able to enjoy the tax and access benefits that come at either of those ages. If she was younger than him, their Centrelink benefits could be maximised as money in superannuation is not counted until the owner reaches pensionable age. Suppose Peter turned 65 when she was 58. He could cash out a large chunk of his super tax free and put up to $450,000 into super in her name as an undeducted contribution and, subject to other assets, get a substantial aged pension and all the benefits that go with it.
A potential benefit in moving superannuation to your spouse’s account is protection against rule changes in the future that may restrict lump sum withdrawals. Personally I don’t think it’s on, but it is obvious from the many emails I receive that a lot of you are worried about it. In the unlikely event of it happening two separate accounts would enable a couple to have two lots of accessible lump sum withdrawals.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com.
Question: I am 65 years of age and recently retired. My wife is 63 and still working part time. We own our home currently valued at $700,000 and have between us $350,000 in superannuation which remains untouched at present. After the sale of a property and combined with savings we have $650,000 in a cash management account - however the returns are not so attractive at present. What would you suggest we invest all or part of the $650,000 into to gain a more interesting return?
Answer: My preference would be for the money to be invested in super in your wife's name as this would enable her to start an allocated pension when she stops work. The fund would pay tax at 15% while in the accumulation phase but once you start the allocated pension the fund will be a tax free fund with all withdrawals tax free. How much better can it get! Just bear in mind there are limits on contributions but she could put $150,000 in this financial year and $450,000 in the next financial year. Once the money is in super you could take advice on an asset allocation that suits your needs and risk profile.
Question: I read that insurance bonds and super were the only vehicles that would not give taxable income. What about dividends from fully franked shares?
Answer: Franked dividends may be tax free in the hands of an investor who earns less than $80,000 a year, but they still give rise to taxable income. In fact the taxable income they create is larger than the actual dividend received because you need to include the franking credits in your income for that year as well as the dividend itself.
Question: My wife and I are both potential first-home buyers. We have $150,000 in the bank and are stumped as to what we should do. Our combined income is $250,000 a year, but with parenthood approximately 12 months away we are hesitant to borrow a large amount. Can you recommend a strategy that would help us? We are torn between buying an investment property or a family residence. We have also been offered a nice place to rent for $500 per week if we were to take on an investment property.
Answer: I suggest you do a budget based on a single income. Buying a well located investment property while you rent elsewhere is a good strategy but make sure you occupy it before you rent it out. Then when you move to the rental property the capital gains tax exemption will be in place for six years which means you should be able to enjoy the tax advantages of having an investment property while not losing your CGT free status.