Spouse contributions splitting

Splitting superannuation contributions to your spouse can be a great way to boost your combined superannuation balances which can benefit you both in retirement. 

What is contribution splitting? 

Spouse contribution splitting allows a couple to optimise their superannuation balances by splitting up to 85% of concessional contributions (CCs) they made or received in one financial year (ie, 2023/24) into their spouse’s account the next financial year (ie, 2024/25). 

Remember, CCs are before-tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee (SG) payments your employer makes into your fund on your behalf. Other types of CCs include salary sacrifice contributions and tax-deductible personal contributions.

The maximum amount that can be split to your spouse is the lesser of: 

Example

Alex and Kat are parents to three young children. Kat has taken time off work to care for their children and has much less superannuation than Alex. 

After speaking to their financial adviser, they decide to split the $20,000 in SG contributions that Alex received from his employer last financial year (2023/24). In August 2024, Alex applies to his superannuation fund to transfer as much of his CCs as he can to Kat.

Alex is able to split 85% of his CCs which provides a much-needed boost of $17,000 to Kat’s retirement savings.

Rules for the receiving spouse 

An individual can apply to split their CCs at any age, but the receiving spouse must be either: 

In other words, if the receiving spouse has reached their preservation age and is retired, or they are 65 years and over, the application to split your CCs will be invalid.

Benefits of contribution splitting

Contribution splitting is an effective way of building superannuation for your spouse and can manage your total superannuation balance (TSB) which can have several advantages, including:

Last word

As always, there are eligibility requirements that must be met and deciding what is best for you will depend on your personal circumstances. For this reason, you may want to seek personal financial advice to determine whether contribution splitting is right for you and your spouse.  

High Income Earners Div 293 Tax

If you’re a high income earner, you may soon be asked to pay an extra 15% tax on the amount of concessional contributions that exceed the $250,000 threshold.

What is Division 293 tax?
Division 293 tax is an additional 15% tax that is payable when your income and concessional contributions exceed $250,000 in 2023/24.

To recap, concessional contributions are before-tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee payments your employer makes into your fund on your behalf. Other types of concessional contributions include salary sacrifice contributions and tax-deductible personal contributions.

It’s worth noting that the extra 15% Division 293 tax is payable in addition to the standard 15% tax that is paid on concessional contributions.

How does Division 293 tax work?
You will be liable for Division 293 tax on either your concessional contributions, or the amount of income that is over the $250,000 threshold – whichever amount is lower. Income for the purposes of Division 293 includes taxable income from a range of sources, such as:
– Employment and business income
– Reportable fringe benefits
– Investment income
– Net financial investment losses, such as negative gearing losses where deductions attributable to an investment property exceed rental income
– Income you may receive due to a one-off event, such as making a capital gain, receiving a work bonus, or a redundancy or termination payment.

Purpose of Division 293 tax
The purpose of this extra tax is reduce the tax benefits that high income earners receive from the superannuation system and to level the tax playing field for average income earners.

Even though high income earners may pay tax on their concessional contributions at 30%, this is still less than the top marginal tax rate of 47% (including Medicare levy) that generally applies to high income earners who are liable for Division 293 tax. As such, making and receiving concessional contributions are still tax effective.

Liability to pay Division 293 tax
The ATO will determine if you need to pay Division 293 tax based on information in your tax return and data they receive from your superannuation fund(s). As a result, there is usually a delay between when the contribution is made and when Division 293 tax is payable.

The ATO will issue you with a notice of assessment stating the amount of tax payable and provide an
authority to enable your superannuation fund to release the money. You also have the choice to pay the tax personally. Note that the tax is due within 21 days of the assessment being issued to you, and certain timeframes also apply if you elect to pay the amount from your superannuation fund.

Protecting your child’s inheritance

Are you concerned about protecting your child’s inheritance from a future divorce or relationship breakdown? The truth is that you are not alone – many parents share the same concern.

Tough times

Many young people struggle to save a deposit to buy a home. By contrast, parents may be in better position to give their children a bequest during their lives to help their children when they need it most, typically as they are looking to purchase a property or when they are paying off a mortgage and raising their own children. For those parents wanting to help their children get started on the property ladder, many are taking legal precautions to ensure their child’s inheritance does not end up in the hands of a former spouse/de facto if they split up. The reality is many marriages and relationships  break down so parents must be on the front foot to ensure their hard-earned wealth remains within their family unit.

Tips to protect your wealth

The following tips can help protect your wealth from your child’s future spouse/partner:

  1. Ensure your child signs a prenup – a binding financial agreement (BFA), otherwise known as a “prenuptial agreement” is a legal document signed by couples either before or during marriage or living together in a de facto relationship. It sets out the way some or all of a couple’s assets, superannuation, gifts, inheritances and potential debts will be divided in the event that their relationship breaks down. As such it can prevent arguments around the splitting of assets and can also help save time and money when a couple separates. For example, a BFA could provide that any inheritance received during the relationship would remain the property of the person who received it if a couple were to go their separate ways.
  2. Establish a testamentary trust – for those looking to provide an inheritance to their children after their death, setting up a testamentary trust (TT) is another option to consider. A TT is a trust created by a will that does not come into force until the death of the will maker. Rather than providing an inheritance outright, assets are transferred into a trust and held on behalf of an individual or group of beneficiaries. As such, your child’s inheritance will remain in the legal hands of a trust and therefore be less likely to be claimed by their spouse/partner if their relationship breaks down.
  3. Sign a written loan agreement if helping children buys a home – another option is for parents to give the money under a properly documented loan agreement to ensure that they could be paid back should anything go wrong. Parents can either register the loan as a mortgage or as a caveat against the title of the property. The benefit of this is that the loan must ultimately be repaid and is a liability that reduces the total assets that are available for division in the financial settlement if the couple separates.
  4. Tenants in common – another option is for your child to purchase their property as tenants in common (TIC) with their spouse/partner so the title is held in proportion to their contributions to the purchase cost. This is different to buying a property as joint owners (or ‘joint tenants’) as TIC ownership does not have to be a 50/50 split. Instead the percentages could reflect each party’s contribution to the property. It also means that when one of the owners passes away, their share is subject to their will rather than going directly to the other owner. Although this ownership structure may be beneficial from an asset protection viewpoint, there are other pros and cons that must be considered.

Seek legal advice

If you’re thinking about helping your children out, make sure you seek professional legal advice from an expert who specialises in estate planning or family law to help protect your assets from others. It may come at a higher cost now, but it will be worth it and work out cheaper in the long run if the relationship goes awry.

Not ‘income’ by the ATO?

It is possible to receive amounts that are not expected by the ATO to be included as income in your tax return. However some of these amounts may be used in other calculations and may therefore need to be included elsewhere in your tax return.

The ATO classifies the amounts that it doesn’t count as assessable into three different categories: exempt income; non-assessable non-exempt income; and other amounts that are not taxable.

Exempt income

As the name may suggest, exempt income doesn’t have tax levied on it. The thing to remember here however is that certain exempt income may be taken into account for other adjustments or calculations — for example, when calculating the tax losses of earlier income years that you can deduct, and perhaps “adjusted taxable income” of your dependants.

Exempt income includes:

Non-assessable, non-exempt income

Non-assessable, non-exempt income is income you don’t pay tax on and that also does not count towards other tax adjustments or calculations such as tax losses.

Non-assessable, non-exempt income includes:

Mortgage vs super – where should I put my extra cash?

Many of us wonder about the best vehicle to use for our extra savings. Is it better to direct extra savings to your mortgage or superannuation? As with most financial decisions, there is no one-size-fits-all approach as it depends on a number of factors for each individual. 

Paying extra off the mortgage

The priority for most people is to pay extra off their mortgage. This is because extra repayments can reduce the amount of interest payable and will help you pay off your loan sooner, freeing you up from mortgage repayment commitments. 

Furthermore, if your home loan has a redraw or offset facility, you can still access your money if your circumstances change. However paying extra off your mortgage involves using after-tax money which is less advantageous than using pre-tax income to invest into superannuation which will eventually be used to pay off your mortgage.

Paying extra into superannuation

Paying extra to superannuation will usually involve pre-tax money by making salary sacrifice contributions. An effective salary sacrifice agreement involves an employee agreeing in writing to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value, such as increased employer superannuation contributions.

As salary sacrifice contributions are made with pre-tax dollars and do not form part of your assessable income, this means these contributions are not taxed at your marginal tax rate and will instead be taxed at a maximum of 15% when received by your superannuation fund. 

It is also worth noting that making pre-tax contributions such as salary sacrifice contributions count towards the concessional contribution (CC) cap which is currently $27,500 pa in 2023/24 (or $30,000 in 2024/25). As your employer superannuation guarantee (SG) contributions also count towards this cap, you will need to determine how much room you have left within your cap before you start salary sacrificing to superannuation. There is the ability to make larger CCs by utilising the carry forward concessional contribution rules if you meet certain eligibility criteria. 

In a nutshell, once the money is in superannuation it is invested and will grow. The power of compounding returns along with the concessional tax nature of superannuation means that even small contributions can boost your retirement savings in the future. When the time is right and you are ready to retire, you can either withdraw a tax-free lump sum to clear your remaining mortgage or commence a superannuation pension and draw tax-free pension payments to meet your mortgage repayments from the age of 60 onwards. 

Example – pre vs post tax money

Bill earns $150,000 per year and has a savings capacity of around $1,000 – $1,500 per month. Bill can either:

Bill decides to salary sacrifice to superannuation. Bill’s contribution is taxed at 15% when it is received by his fund so his end contribution is $1,349. For the same out-of-pocket cost to Bill, his superannuation fund receives an extra $349 each month. 

This example shows the difference between Bill’s marginal tax rate (37%) and the tax rate on contributions (15%) constitutes the benefit of salary sacrifice contributions. As mentioned above, Bill will need to ensure he does not exceed his CC cap by making extra salary sacrifice contributions to superannuation. 

Final thoughts

So which option is better? Well it depends. The answer boils down to a number of factors that need to be considered, such as your mortgage interest rate, your income and marginal tax rate, your superannuation investment strategy, and your age to retirement. If you need extra information or advice on what you should do, make sure you speak to a financial adviser before you make any financial decisions when it comes to your mortgage or superannuation.

Succession planning for family businesses

For most family businesses as well as private groups, succession planning (sometimes known as transition planning) involves considerations around the eventual sale of your business, or the passing of control of it to other family members when you retire. Depending on your circumstances, this may include realising assets and making other changes to ownership, but is certainly tied up with retirement planning and estate planning. 

Adopting a sound tax governance framework can help you manage tax issues around succession planning before they present a problem. Though succession planning may not have an immediate tax impact, it’s important to include tax considerations in your plan. This will avoid unexpected tax issues arising down the track when you implement your plan.

Transferring control of your business to family members may involve restructuring your business operations – changes to share structure, changes to the trustee and appointor of a trust, changes to partnership structures – or transferring assets to family members via the creation of trusts or other entities. Remember that these sorts of events can have legal and tax implications that need to be carefully considered. A common assumption with business owners is that the transaction being considered is a single “sale” — that of the business — whereas it is actually many sales of individual assets that need to be accounted for, possibly with different tax outcomes.

For example, when you dispose of or transfer your business assets there will likely be capital gains tax (CGT) consequences. The sale of a business can also trigger liabilities in relation to GST and, where applicable, wine equalisation tax, fuel tax credits and excise duty.

Where pre-CGT assets are involved, you should also understand and document the tax consequences for you and your beneficiaries. Issues for consideration include whether changes in the business operations may affect the pre-CGT status of the assets or shares and the availability of carried-forward losses.

Any significant changes to your business structures or operations (including any asset disposals) should be fully documented, along with their tax impact. Ensure information on your assets (such as acquisition dates and cost base) is properly documented. This will also ensure that any subsequent disposals of the assets can be treated correctly for tax purposes. Different strategies will have different tax consequences for the owner and beneficiaries. Consider each strategy and identify (and keep records of) significant transactions.

For example, say, as the owner of a successful family business, you prepared a basic succession plan many years ago, but since then your business has expanded and your children have grown up. One of them may work with you in the business and you would like to see them take over when you retire. The discussion you could have with this office would be how best to transfer the business and make the transition to retirement.

One option could be to restructure your business as a family trust, so you can still have some control of the business while reducing your involvement in the day-to-day operations. We can explain the tax consequences of this strategy, while also alerting you to other options and tax considerations. Once you decide on your strategy, you update your succession plan, which now includes a section detailing the tax treatment and tax payable on transfer.

Whatever strategies you use to transfer your business onto the next generation, make sure your plans are documented and you seek advice from professional advisers where needed. This will reduce the risk of incorrect tax treatment and outcomes, and possibly consequent penalties.