Below we outline 5 useful strategies for boosting a spouse's super earnings. They are:
- Splitting contributions — still attractive to some, even after the 2006 Federal Budget, see below
- Making after tax contributions for a spouse
- Claiming any available spouse contribution tax offset
- Spouses' personal contributions, even if spouse unemployed
- Government co-contribution
Strategy 1 - Splitting contributions made on your behalfThe pre-Budget position
In general, a contribution made in a previous financial year can be split:
- 85% to a spouse if the contribution is a deductible contribution; and
- 100% to a spouse if the contribution is an undeducted contribution.
This splitting strategy works well for a person who looks likely to have RBL problems, but whose spouse has plenty of headroom below their RBL. Many high earners (at least until Budget night) had re-thought their salary sacrifice strategy to make additional contributions which they planned to transfer to a spouse's account.The Budget proposals
The Budget proposals which reduce the effectiveness of this sort of splitting are:
- Removal of tax on benefits for people over 60;
- Abolition of RBLs;
- Ceiling on tax effective salary sacrifice: that is, if a person's total deductible contributions are more than $50,000 in a year, then the amount above $50,000 will be taxed in the fund at the top marginal rate for individuals.
These proposals would apply from 1 July 2007.Do the Budget proposals really "destroy the benefit of splitting"?
On the one hand, many commentators have concluded that there is now no incentive to transfer contributions to a spouse. They base this conclusion on the belief that that:
- there will no longer be problems with excessive benefits
- the benefits will generally be received free of tax by either spouse; and
- the cap on tax effective contributions will inhibit salary sacrifice.
On the other hand, contribution splitting would remain effective for:
- people who intend to retire between 55 and 60;
- people with spouses who will reach 60 before them, thus accelerating access to tax free benefits; and
- people who are sceptical about the permanent abolition of RBLs.
Also, salary sacrifice is potentially available up to the age based limits until 30 June 2006. Given the levels of the current age based limits, the tax effective limits for those aged over 50 are more generous until then than those proposed from 1 July 2007.
Strategy 2 - Making after tax contributions for a spouseThe pre-Budget position
A person can make after tax contributions for their spouse to boost the spouse's superannuation savings. This is a good strategy for spouses who do not have an RBL problem. (It doesn't work for those with RBL problems because the investment income on the contributions will become taxable benefits on withdrawal.)
This strategy is currently considered to be a good way to generate investment income in a tax sheltered environment. Currently, there is no limit to the amount of after tax contributions a person can make for their spouse. However, the tax effectiveness of the approach is currently limited by the anticipated investment earnings and the aggregate superannuation savings of the spouse in relation to their RBL.The Budget proposals
The Budget proposals which reduce the effectiveness of after tax contributions to a spouse are:
- most critically Immediate restriction to $150,000 per year (from Budget night) on undeducted contributions made by an individual, with any excess to be returned by the fund. It is unclear how this restriction will be administered or how it would be applied to spouse contributions. But given the declared policy reason for its introduction, it is likely to extend to contributions made by a spouse;
- Removal of tax on benefits for over 60s (from 1 July 2007); and
- Abolition of RBLs.
The "immediate restriction" applies already (from Budget night). The other 2 proposals would apply from 1 July 2007.How much do the Budget proposals reduce the value of after tax contributions?
Even if the Budget proposals are implemented, making contributions on behalf of spouses will remain an efficient method of providing for a spouse's retirement (within the restraints which will apply to undeducted contributions).
In the absence of other restrictions, removing tax on benefits and the RBL would make undeducted contributions a universal means of access to a tax sheltered savings environment for all surplus cash. However, the cap on undeducted contributions is intended to prevent the use of superannuation funds as a general savings vehicle rather than as a retirement funding method.
Strategy 3 - Claiming any available spouse contribution tax offset
A person can claim a tax offset if they make an after tax contribution to a spouse whose assessable income plus reportable fringe benefits total less than $10,800. The offset is calculated as 18% of contributions up to $3,000. It remains available at a reducing rate until spouse income reaches $13,800.
This concession appears unaffected by the Budget proposals.
Strategy 4 - Spouses' personal contributions, even if unemployedThe pre-Budget position
A person under 65 does not have to be employed to make contributions. (This has been the law since 1 July 2004). Depending on the spouse's income circumstances, some of these contributions may be deductible. In particular, contributions are deductible if the spouse is an "eligible person" _ that is, (in general) has income other than employment income which makes up 90% or more of their total assessable income and reportable fringe benefits. In that case, a deduction is available for the first $5,000 of personal contributions and for 75% of the excess over $5,000 (subject to age based deduction limits).The Budget proposals
The Budget proposals that affect an unemployed person making contributions are:
- the limit on undeducted contributions, see Strategy 2 above; and
- the imposing of the top marginal tax rate on deductible contributions over the proposed $50,000 cap, see Strategy 1 above;
- that the deduction arrangements that apply to the employed also apply to "eligible persons", which includes the unemployed.
The limit on undeducted contributions applies already (from Budget night). The other 2 proposals would apply from 1 July 2007.Do the Budget proposals reduce the value of an unemployed person making contributions?
Until the final form of the legislation is released, it is too early to say whether the Budget proposals reduce the value of an unemployed person making contributions. , However, while the potential amount of a spouse's personal contributions would be limited to the $50,000 cap, the current non-deductible elements of the first $5,000, and 25% above the first $5,000 would be removed.
Strategy 5 - Government co-contributionThe pre-Budget position
If a spouse qualifies for the Government co-contribution and his or her total income, including any reportable fringe benefits:
- is less than $58,000 for the current year, then the spouse may be able to obtain a government co-contribution for up to $1,000 of personal contributions
- is less than $28,000, then the Government co-contribution is $1.50 for each dollar contributed up to $1,000. For example, for a contribution of $1,000, the government would co-contribute $1,500.
The co-contribution is phased out by 5 cents for each dollar by which the spouse's total income exceeds $28,000.
To qualify, the person must meet
- residency and age qualifications
- the income limits indicated above; and
- must not qualify for deductions for personal contributions as an, "eligible person" (including an unemployed person) see Strategy 4 above).
Budget proposals would remove the restriction applying to eligible persons.Do the Budget proposals affect the co-contributions?
If the Budget proposals are implemented an unemployed person could benefit from the co-contribution (as long as the person met the other conditions).
If it becomes clear that the Budget proposals will be enacted, strategies which have been adopted in recent years to boost spouse superannuation entitlements may need to be re-visited. The proposed changes would particularly affect contribution splitting strategies and undeducted spouse contribution arrangements.
If any of the 5 strategies discussed above are critical to current planning, then arranging immediate advice is strongly recommended.