Tony Negline says the Gillard Government’s superannuation policy, which will apply from July 1 next year, still contains many unknowns.
From July 1, 2012, super investors who are aged at least 50 will have a concessional contribution cap of $50,000 if they have less than $500,000 in super assets.
The precise details of how this policy will work are unknown. The current unknowns are as follows:
1. When is age 50 determined – at the start, during, or end of a financial year?
2. At what point and how will the $500,000 in super assets be assessed?
Last February, the Government released a discussion paper on some options for the design of this policy. The paper proposes three different alternatives for how the $500,000 will be measured:
1. All withdrawals from super would be tracked and counted towards the $500,000 threshold. Under this option “withdrawal” is not defined, but it seems to only include lump sums and pensions. Additionally, it is not known from which date withdrawals are counted. If withdrawals are used to assess access to the higher Concessional Contribution Cap, then we’ll have a de facto return of the Reasonable Benefit Limit (RBL) system. Surely only the grossly envious would want this outcome.
2. All withdrawals would be ignored and the super investor’s account balance would be the only check to determine if the $500,000 threshold has been breached.
3. If any money is withdrawn from the super system then access to the increased Concessional Contribution Cap would be denied.
Until we know the precise design features of this policy it is difficult to determine the best way to work around it.
One super strategy which may be handy is contribution splitting. Super contribution splitting (SCS) allows a member to transfer contributions made during a financial year to their spouse.
SCS may be useful if super fund withdrawals (lump sum or pension) are not used to determine eligibility. It may also be useful if withdrawals are counted against the $500,000 limit but movements caused by SCS are not counted as a withdrawal and hence are ignored. It may be that SCS is useful in the 2011 financial year and possibly later.
So how does SCS work? Firstly, contribution splitting is not compulsory for super funds. This means that you should check your fund’s trust deed and administrators to determine if the strategy can be adopted.
Next, it appears that SCS is available for all spouses, including same-sex spouses.
However, whilst a couple might satisfy the normal spousal rule, there is a further rule that has to be considered. Contributions cannot be split if the receiving spouse is:
• 65 years or older; or
• aged over preservation age (55 for those born before July 1960) and under age 65 and satisfies a super preservation condition of release, such as retirement.
A fund can split contributions if the receiving spouse can declare that they might be aged between preservation age and 65, but they don’t satisfy a condition of release.
Is a spouse who has never worked – or, at best, has not worked for many years – entitled to claim that they aren’t retired? Their declaration presumably has implications for gaining access to preserved benefits. In many cases this will turn on complex factual issues. Ordinarily this is a very tricky issue for super funds and financial planners to sort out and comply with correctly. Good documentation, including keeping appropriate file notes, will be essential.
In arrears
Contribution splitting can only be done in the year after a financial year has ceased. For example, contributions made during the 2010-11 year can only be split during the 2012 year. Once the 2012 year has finished, the 2011 year contributions cannot be split.
There is one exception to this rule. Contribution splitting is allowed during a financial year when a member is rolling over or transferring their entire account balance.
One application per annum
The super splitting regulations only allow a super fund to accept one member contribution splitting application per annum.
This restriction is presumably to limit fund administration costs. (Imagine the cost of processing contribution splitting applications of $100 which are made each day of a particular year.)
Trustee must act within a certain timeframe
Although the splitting rules say trustees must act on a splitting application as soon as possible (or in any case, within 90 days of receiving an application) the splitting rules are not an operating standard applying to all super funds, and there appears to be no penalty for funds that do not adhere to the above maximum timeframe.
Maximum that can be split
This maximum is 85 per cent of contributions taxed in the super fund. Typically this will be Concessional Contributions (that is, all employer or member deductible contributions).
No part of any rollover or benefit transfers can be split.
Any contributions subject to a divorce settlement cannot be split. Additionally, only contributions made into a super fund’s accumulation benefits can be split. This means contributions made to defined benefit funds cannot be split.
Special rules for personal deductible contributions
Personal contributions not claimed as a tax deduction cannot be split.
This means that if a super fund member wants to claim their personal contributions as a tax deduction, and will want to split those contributions with their spouse, then the request to claim the deduction must be sent to the super fund first.
