Nick Bruining: Hacks to bridge the superannuation gender gap with spouse splitting

The looming tax on superannuation balances over $3 million might not affect many, but strategies used to reduce its impact could have benefits for any couple with a fund imbalance.

Apart from boosting your partner’s retirement nest egg, you could also save your loved one thousands in tax when you eventually, and inevitably, pass away.

Spouse-splitting is a popular technique that allows couples to transfer some of their superannuation to a partner. For those wanting to max out their entitlements, there’s a two-step process to follow and, in most cases, part two can only be done once you turn 60.

It’s also important that you complete part one of the strategy before your next income tax return is lodged.

Part one involves spouse-splitting and allows you to transfer 85 per cent of your concessional contributions to your partner’s superannuation fund. In essence, the 85 per cent figure is the net amount invested in super, once the normal 15 per cent contributions tax is applied.

Concessional contributions include your employer’s compulsory 11.5 per cent contribution — now 12 per cent as of July 1 — and voluntary concessional contributions, including money that was salary sacrificed or personal contributions where you claimed a tax deduction.

Normally, this would be subject to the annual $30,000 cap, meaning 85 per cent of this figure — or $27,500 — could be transferred. If you can access carried-over unused concessional contributions from previous years, that’s also available.

Carry-over contributions allow those with a Total Superannuation Balance of less than $500,000 as of June 30, 2024, to apply up to five previous years of contributions. In theory, that could have been as much as $162,500 for last financial year, less concessional contributions already made.

For this financial year, the grand total is potentially $165,000.

For example, let’s take a self-employed individual who has $495,000 in super on June 2024 and has made no tax-deductible contributions to super in the past six years.

Our example sells an investment property with a $200,000 assessable capital gain. They could have deposited and claimed a $162,500 contribution to super last financial year. That would make a significant dent in the capital gains tax liability.

Our example can now transfer 85 per cent — or $138,125 — to their partner’s super fund, as long as it is done before they lodge their 2024-2025 income tax return.

Because it’s regarded as a rollover and not a contribution, it doesn’t affect the partner’s ability to continue making their own contributions to super.

The rules require the partner to be eligible to receive a concessional contribution and not have satisfied a condition of release at the time the spouse-splitting takes place. In simple terms, it will be almost impossible to spouse-split once the partner reaches 65.

Check with your super fund to see what’s required to split your contribution, as it’s not mandatory for a fund to offer the option and they may charge you a fee.

Your super fund or the Australian Taxation Office can also provide you with the contributions splitting form that needs to be completed and sent to your super fund, not the ATO. The form requires both you and your partner’s signatures to finalise the transfer.

The same rules prevent you from transferring or splitting existing balances and non-concessional contributions, but there’s a way around that, too. It has the added benefit of saving your loved one considerable tax when the remaining super eventually passes to them.

Part two of the strategy is based on a technique called re-contribution. You can withdraw $360,000 from your taxed super fund tax-free, once you satisfy the release conditions and are over the age of 60. That withdrawal could then be contributed to your partner’s super fund.

The significance of that $360,000 is that this aligns with the maximum amount your partner can contribute as a non-concessional contribution to super, making use of the bring-forward rules.

Non-concessional contributions are not subject to a contributions tax and attract tax-free status when the balance of the super fund is paid out as a death benefit payment to non-financial dependants. In essence, that could save your kids up to 17 per cent tax, including the Medicare levy.

There are contribution limitations if your partner is approaching a thing called the Transfer Balance Cap, which is now at $2 million or lower, if they started an income stream earlier.

In any event, spouse-splitting can go a small way to correcting the significant gender imbalance in the current retirement income system.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association