Contribution splitting - Frequently asked questions

You are listening to the first tech podcast. These podcasts are designed for authorized financial advisors. If you are not an authorized financial advisor, you may find the content of this podcast difficult to follow as it assumes you have the necessary training and qualifications to understand the concepts discussed. You should also be aware that the information contained in this podcast is general information only and does not take into account any of your personal circumstances needs or objectives. Splitting concessional contributions into a spouse's superfund is a widely recommended strategy among financial advisors. It can offer a range of valuable benefits for clients. For example, it can help equalize superbalances between spouses which is important for maximising supercontribution opportunities and optimising the amount that can be invested in tax-free pension accounts and even potentially help manage this upcoming division 296 tax. And while the process of splitting contributions may seem straightforward, it's a strategy that often raises a lot of questions from both clients and their advisors. My name is Craig Day, head of the first tech team. And today I'm joined by Linda, who's here to help unpack the top six questions advisors commonly asked about supercontribution splitting strategies. Hello Linda. Hey Craig, how are you? I'm good, self. Good, good. So when we're recording this, it's been raining for like a week. Yes. We're a bit over it, aren't we? We're good over it. But you know, we're not in the, you know, central coast or mid-new South Wales where people are getting flooded so we can't complain too much, so wishing them all the best. Now Linda, we're going to talk about spouse contribution splitting. Yes. Now before we get into the different questions and these are all questions that we've had and actually one of them's quite interesting because it involved a fight we had with a different superfund, which we won. Yes. Can you remind us how the super contribution splitting rules actually work? Sure thing Craig. At a high level, if a client is a member of a techs the superfund, such as a retail fund, the industry fund, all and self-managed the superfund, the client can request the superfund to split up to 85% of their concessional contributions from the previous financial year to their spouse's super account. Now, if the client is a member of an on-text fund, they may be able to split 100% of their concessional contributions that are not part of the different benefit component. However, the amount that can be split cannot be more than the client's concessional contributions cap in that financial year. Also, there are some conditions that are applicable to the receiving spouse. That is, the receiving spouse must be at age 60 or between age 60 and 65 and have not met a retirement conditional release at the time the split request is made. Now, the contribution splitting cannot be made to the spouse's super account if the spouse is aged 65 or over. Now, that last bit you were just talking about, that's just basically avoiding people using splitting to get around the preservation rules. So, I split my benefits over to my spouse, it's already satisfied a conditional lease, and then they pull it straight out of super. Now, also, today, although you mentioned splitting an on-text fund, that's pretty niche. That would be its own podcast for the three people out there that might be interested in that. So, today, we're just going to focus on splitting contributions made to tax superfunds such as retail funds, industry funds, so large app or regulated funds, as well as self-managed superfunds. So, as you mentioned, the amount that can be split is limited to 85% of the concessional contributions, and cannot exceed the client's concessional contribution cap for the year. So, this is our most frequent ask question we get from advisors, and it's this. So, when we refer to the concessional contribution cap, does that just mean the standard annual cap, or can it also include the carry-forward unused cap amount from the previous five years if the client is eligible? So, for example, if the client made $100,000 personal deductible contribution last year, and that amount was within the client's concessional cap, including their carry-forward unused concessional contribution cap amount, can the client actually split 85% of the $100,000, or are they limited to splitting the client's standard concessional cap? So, last year was $27,500. Yeah, the legislation refers to the concessional contributions cap, rather than the standard concessional contributions cap, which is good news. So, from the legislation perspective, if the client was eligible to use the five-year carry-forward, are used the concessional contributions amount, which requires the total super balance to be lower than $500,000, at the previous 30th June. Now, their concessional contributions cap would include the carry-forward unused concessional contributions amount. In your example, Craig, the client can actually request the super fund to split $85,000, which is 85% of the $100,000 concessional contributions to the subout super, provided all other eligible criteria are met. Right. So, that's the technical answer. Yes. But also, there's a practical answer here as well. So, some funds, they'll just go, no, their rules just apply. They're just going to do the general concessional cap, aren't they? That's right. Where they've come across that before. Yeah. So, if you're wanting to do this with a particular fund and you've used the carry-forward rules and you've made this $100,000 personal electrical contribution in your intending to split that over to Spelts, check with the fund for you try and do that because they might just go, no, sorry, we're not going to do it. And they can, because there's no, it's not a compulsory for the founder to offer super splitting, right? So, the founder might have their own specific governing rules that prevent or most restrictive than the legislation. Yeah. So, but see this. We'll let you do it. We'll let you do it. Okay. So, we're one of the funds that does. So, you know, we're not necessarily saying use us, but just make those inquiries before you do it. Otherwise, you could find that, you know, you had this great strategy and then it doesn't work because the fund's not going to let you do it. And you can't then roll over the contribution to a different fund because you didn't make a contribution to that fund. That's right. Yeah. Right. So, just, just check before you do it. Now, the second question is this, can a client split excess concessional contribution? So, for example, let's say the client's concessional contribution cap is $30,000 this year. The concessional contributions that the client's super funds receive during the year is, let's say it's $35,000, which obviously breaches the client's concessional cap. They can't use the carry-fort rules. Maybe they don't have any or they're over $500,000 on last 30 June. Now, in this situation, what if the maximum amount that the client can request to split? Is it 85% of $30,000 or is it 85% of $35,000? It's a new though. There's nothing in the legislation that prevents the client from splitting the excess concessional contributions. However, there are rules. The maximum of depletable amounts is the lesser of the two. The first is 85% of the client's concessional contributions made to that fund. And the second is the client's concessional contributions cap. So, in this case, 85% of the 35,000 concessional contributions equals $29,750. Since this amount is less than client's concessional contributions cap. You mentioned $30,000 standard cap. The client can actually request to split the $29,750 in the next financial year. Even though 5,000 out of the 35,000 the contributions the fund received was actually access concessional contributions. Okay, so, but there's going to be issue there with, you know, those excess concessional contributions counting towards the client's non-concessional cap. Unless you take it out. But if you've split everything over to your spouse, can you still comply with the, does that cause you a problem, is essentially what I'm saying? Such a great question, Craig. Potentially, it won't be a problem. As long as the client has a remaining balance in any superfund that can cover the amount they want to release from the superfund. In other words, as long as you can release the 85% of the access concessional amount from any superfund, it doesn't have to be this one. Yeah, it doesn't actually, you're not actually really simply releasing the contributions. No. It's the amount that you have to realize. Exactly. Right. Okay. Terrific. Now, so obviously, advisors need to keep this in mind, especially when the strategy involves maximizing the client's non-concessional contributions. So just keep in mind there, if you're not going to release it and, you know, that could trigger an excess or even probably even worse and you won't realize this is it could cause you to trigger the bring forward rules early than you thought you were. So when you go and put in the 360 next year, you've already used up 120. It's a nightmare, right? So just watch out for that. Moving on to the third question, so we're getting through these. And this is relating to the receiving spouse. So if I'm actually splitting an amount to my spouse of concessional contributions, do those concessional contributions count towards the receiving spouse's concessional contribution cap? No, it doesn't. The contribution to splitting benefits is a peter to the spouse's super found as a roll over super benefit as we all know. A roll over benefit does not account towards the receiving spouse's contributions cap. Okay. So it's just normal rules person is making contribution to their own accounts towards their concessional cap. Yeah. They decide it's but that's a roll over it doesn't count towards the receiving spouse's concessional cap as well. It's not being double counted as what we're saying. That's right. Okay, terrific. Now you mentioned there it's a roll over. So is that the same as a standard member benefit super roll over? They are similar but not the same. There are two key differences. The first is that the super splitting can only be taken from the taxable component of the client's super. Okay. As a result, the splitting roll over can only contain taxable component when the receiving found the received the split amount. The receiving found will add that amount to the taxable component of the receiving members super benefit. That's the first. So if it was just a normal roll over and the member has tax-free and taxable, then it goes proportionally, doesn't it? Yes. Right. So that's the first key difference what's the second one? The second thing is based on of a technical analysis. So our technical view is that the contributing spouse eligible service period should not be carried over to the spouse superfound. Which is what would happen if it was a normal roll over? Exactly. Yeah. Yeah. This is really important. Yeah. Because if the contributing spouse eligible service date is much earlier, the longer eligible service period could reduce the tax-free uplift. That could be available if the receiving spouse becomes a permanent incapacitated. Now, if the client's eligible service period is not carried over, we don't have to worry about the potentially a longer eligible service period. Now, to our knowledge, most of the superfound follow the legislative requirement to use the date, they process the contribution splitting request as the start of the eligible service date when sending data to the receiving fund. However, it's essential to confirm this directly to the specific superfound that our advisors are dealing with because their process may not be the same. Okay. I would also imagine here this is probably another way an advisor can add value right. Because if, for some reason, the client is in this situation and the advisor knows that there has been some contributions splitting going on, a good thing to do would be to check what eligible service date is actually being utilised to calculate the tax-free uplift. Because if they're utilising the eligible service date of the spouse, like it was a normal roll over from the spouse to themselves, that's not right. Well, we don't think it's right. So, if you did see that, it would be just absolutely worth challenging that. With the superfund, a lot of superfunds will apply that approach anyway, so it shouldn't be an issue. But with any sort of tax-free uplift or any sort of thing like this, it's always really important for advisors. Just go back and check all the details because sometimes funds get it wrong, right? And that can make a significant difference. And so, if they've used the wrong eligible service date here and it should be a shorter one rather than longer one, that could make a difference to the amount of tax-free benefits. Totally. Okay. All right. Now, moving on. As you mentioned earlier, contributions putting is essentially a roll over to the spouse and superfund, just a different type of roll over. Now, we know that a roll over can affect a client's ability to lodge a valid notice of intent for their personal contributions made prior to the roll over. Now, does a roll over for contributions splitting have that same impact? So, for example, let's say I've got a client made a $20,000 personal contribution yesterday, intends to claim this amount as a tax deduction, but before the client lodges their notice with the trustee, the superfund processes their request to split 85% of last year's concessional contribution to the spouse's superfund. So does this mean, Dan, the client can no longer claim or lodge a valid notice of intent for the full 20,000 given its, you know, this roll over has happened? The beauty of contributions splitting roll over again is different from the standard roll over. Is that in this situation, the client can still have the opportunity to lodge a valid notice of intent to cover the full $20,000 provided they haven't done any other withdrawals or roll over since making that personal contribution just a little disclaimer here. So what's the reason? This is because, as I mentioned just then, the contribution splitting roll over will only be taken from the taxable component of the client's superinterest. It does not reduce or affect the client's remaining tax-free component and lodging a valid notice of intent is all about the remaining tax-free component. Therefore, the client can still lodge a valid notice of intent to include the full entire $20,000 as they were mounting intended to claim as a tax deduction. Now, as I mentioned in upfront, we talked about where we had a fight with another superfund. Yes, so we did. We didn't involve it in a fist, but we got a call one day from an advisor that was questioning this and their client had made a contribution to a different superfund and they know they called us, thanks, you know, I wanted to call them, but they did, they called us and we sat there and looked at the rules and said, "No, that there's 100% of that personal non-contextional contribution still sitting there." The full amount of the tax-free component, you should be able to lodge a notice of intent with that other fund. We recommend you go back and challenge. And then we got a lovely message from that advisor saying, "Yep, the fund has now agreed and they've processed a deduction notice for the full amount of the contribution." So a little win for the advisor that we helped with there. So fight the fight, fight the good fight is if you come across one of those ones. So question five, almost getting that. So let's say a client had $500,000 in one superfund. Let's call it superfund A. And superfund A processes a member roll over or $450,000 to superfund B upon the client's request. So there might be, you know, it's a different fund that I want for some reason, but they still want to maintain enough benefits maybe for insurance purposes and the original superfund rights. So they're doing a partial roll over here. Now in this situation, can the client still request fund A to split, let's say $20,000, which is 85% of last year's concessional contribution to their spouse is super in that situation? Good question, Craig. And at the end, you know, you're not going to like this. It depends. Let's have a look what the legislation says. The super law does know the prevent a member from splitting their concessional contributions to their spouse simply because a partial roll over is completed. This is very different to processing the notice of intent. However, the super law only allows the trustee of the superfund to accept a splitting request if the remaining taxable component of the members benefit is sufficient to cover the requested split amount. So in your example, Craig, if the client's remaining super balance of what is $50,000, yeah, if that includes $20,000 or more in the taxable component, yes, the trustee over the superfund is allowed and the super law to accept the request to split the $20,000 to the spouse super account. Well, what if it's that taxable component is less than $20,000? In this case, the trustee over the superfound can only approve a splitting request up to the amount of the remaining taxable component. So they can request, but it's only up to, it doesn't wipe out the whole request. Sorry, there's not enough. You can't do it at all. You can do it, but it only up to the extent that the amount of taxable component that's sitting there, because we know we can't split taxable component. That's right. That's right. And subject to the rules, they might ask you to send in your request. So something to be aware of. Question number six, the last one. If the contributing spouse has met a full condition of release, like retirement, can the contribution split amount retain its unrestricted non-preserved status when it's transferred to the receiving spouse? So in this situation, it's not like I talked about earlier on when we talked about people dodging the preservation rules where it's the other way around. It's the other way around. Yeah, so if the older spouse has satisfied that condition of release and they want to split across to the younger spouse. So the older spouse has 100% unrestricted non-preserved component. They can access the amount at any time they want, the transferred un-amount. Back to the younger spouse? Yep. Now I can see this is likely to go two ways. One really good way is it maintains its unrestricted non-preserved component. Or it gets preserved. Yeah. The way you're looking at me, I'm thinking it's going to be preserved, is that the way it works? That's right. If this is the standard member benefit rollover, yeah, the unrestricted non-preserved would be retained as unrestricted non-preserved by the receiving spouse. Of course, it's not a standard member benefit rollover. The answer is no, actually, and the superlaw, the contributions splitting rollover amount is required to be preserved in the receiving spouse account. Regardless of preservation status, they had in the original member to supervound. Therefore, the split amount becomes a preserve the benefit for the receiving spouse, and they will need to meet a conditional release in their own right to access this amount. Now, the advisors will need to want the clients in your situations to look at this, that the clients may lose access to otherwise accessible or meaning the unrestricted non-preserved component. So, taking this account, you might be sitting there thinking, well, why would you do that? Well, you want to do it for, you know, specialization strategies, right? So, it's still a valid strategy to do. You just need to want the client to say, look, we're going to do this, I'm recommending to, but if we do it, that $20,000 that we're going to split across, that's currently unrestricted and observed, it's going to be very preserved. You won't have access until you spouse had a size of conditional release. So, as long as they get that and through the head and understand it, I think you're going to be fine. You just don't want the situation where you split the amount across and then all of a sudden, for some reason, they want to access it and they can't. That's right. That's when you get annoyed clients and things like that. Now, what if the splitting spouses super had both preserved and unrestricted non-preserved benefits? So, now, thinking about that, maybe the client, they ceased an arrangement of employment after turning 60, they're not yet 65, and then they go and make another contribution. That's going to be preserved. So, you're going to have preserved and both unrestricted non-preserved benefits sitting inside the same front. So, what happens there? Yeah, great question, Craig. Think about it. This is not an uncommon scenario. Actually, there's no requirement under the super law for the trustee to follow a specific cashing order when processing a contribution splitting request. Now, this is very different to the rules that apply to family law super splits where the specific cashing order rules do apply. So, that's divorce and yeah, it's so different. This is people still together splitting their contributions. Exactly. Okay, go. Let's go back to contribution splitting. The trustee actually has a discretion to determine which component of the members benefit the split amount is taken from. However, this discretion may be limited or guided by their family rules which could specify a particular cashing order. In situations like these, advisors should check whether the relevant super founder to confirm whether it is possible to process the contribution splitting request from the preserved component only. This can be useful strategy if the client wanted to return access to their unrestricted non-preserved component. Okay, all right. Well, that's our six top questions around splitting. So, obviously, some really important, you know, it's a very important strategy, especially things like potentially division 296 coming up or transfer balance cap or you just you just want to equalize balances because it's a, you know, potentially prudent thing to do. So, obviously, some good rules there, some great strategies, some opportunities in what we've talked about today. So, things, you know, think about if the client does is able to use those careful concessional contribution rules, you know, don't think that the splitting amount is just limited to what is at the concessional cap or 85% of their contributions can potentially split more, but there was also a number of traps in these rules. So, what we talked about before is if we're, you know, splitting unrestricted non-preserved amount over to a client that doesn't have any unrestricted null or haven't satisfied a conditional release, then that represerves that. So, swings around about so on this are really useful strategies. Now, in terms of if you want, if you want to know more, now always give us a call in the first tech team. You can go and look at the first tech super guide. That certainly got lots of information about splitting. Give us a call and we can try and help you. I think that about wraps it up, Linda. Yeah, thanks Craig. Thanks Linda and thanks everyone for listening. Thanks for listening to the first tech podcast. Please note these podcasts are designed for authorized financial advisors as a source of general information. All scenarios considered during the podcast were purely hypothetical and for illustrated purposes only and do not constitute a recommendation to purchase, hold or sell any financial products or take any other course of action. You should read the relevant product disclosure statement before making any investment decisions and once again consider talking to a financial advisor. While all care has been taken in preparation of this podcast using sources we believe to be accurate and reliable, no person, including colonial first aid investments limited and advanced investments limited accepts responsibility for any loss suffered by any person arising from reliance on this information.