Contribution Splitting in a SMSF
Splitting concessional contributions amongst members or spouses can be an effective strategy provided that you benefit in the following ways.
1) It creates a Tax-free portion for the receiving spouse – like a re-contribution strategy
2) It’s tax deductible for the contributing spouse ( subject to PSI or the 10% income test) if they are self-employed
3) It can provide early access to pension payments and TTR pensions, for the spouse who is receiving the payment particularly if they are older than the contributing spouse
So how does it work?
Tony is 51 years old his wife Amanda is 55 and works part time. Tony wants to split his super ( concessional contributions) with his wife so she can start a tax-free pension as she has met preservation age.
Tony contributes $35,000 in 2014-15 Financial year and claims the split in the 2015-16 financial year
- Tony (self employed) $35,000 ( 2014-15 FY)
- Minus tax $5,250
- Contribution applied $29,750 to spouse’s account
The super fund or accountant will apply 85% of the contribution ( minus 15% super tax) recorded as a contribution for Tony, who makes the contribution. It is received by Amanda and recorded in her member statement as a tax-free component.
As SMSF’s mainly operate a pooled strategy, there is no money to transfer to another fund in an SMSF. It is simply recorded as received by the spouse on her member balance, as an amount in the tax-free component of her member balance for the financial year where the split was applied.
- When Amanda is 60, she is able to commence a TRIS or TTR Pension with tax-free money
- Tony claims a tax deduction for the contribution split
- Amanda is able to draw an income sooner from a tax-free source, which further creates a succession benefit for their adult children
These are the conditions:
- The contribution to be split must be applied to the following year from the year it is received
- The receiving member must be under age 65 and not retired
- Only 85% of the contribution ( excluding super tax of 15%) may be applied to the receiving member
- You only split concessional contributions, both employer paid and salary sacrificed amounts
- A contribution split form must be received by the super fund
Warning: Always seek advice on these arrangements as they are complex to administer.