Equalising Spousal Super Balances Has Never Been More Important

Two Barriers to Higher Balances

The first barrier comes in the form of what is known as the transfer balance cap—the total amount of money that you can roll over into a tax-free pension account.

At the moment that amount sits at $2.1 million, so if one member of the couple might break above that limit, it would have been much more advantageous for the super money to be held by the partner with a lower super balance.

If the high balance partner has more than $2.1m to transfer to pension phase, the excess amount must be left in an accumulation account where it remains subject to the 15% earnings tax or can be transferred out of super entirely once a condition of release has been met.

Once withdrawn it can be added to the partner’s super accumulation account but only subject to the limits on concessional and non-concessional contributions.

The other tax barrier to be aware of is the $3m threshold that applies for the calculation of the new division 296 tax.

Division 296 means an additional 15% tax on earnings related to the proportion of a super balance above $3 million, so it can be a substantial and ongoing impost compared to having two super lower super balances that remain under both the $2.1 million transfer balance cap and the $3 million division 296 cap.

By achieving a more equal balance between two super balances that will be relied upon to produce income in retirement, the difference can easily amount to hundreds of thousands of dollars over the retirement period.

One Extra Benefit

There is also one extra non-tax benefit from ensuring that spouses have roughly equivalent super balances.

Maintaining similar balances can reduce worries about what happens when one spouse dies because the other member of the couple has their own independent income source that they can live on until they or someone else who is named as the super beneficiary can get access to the account.

It is also a great source of comfort to couples in which one partner is much younger than the other or is in much better health.

How to Get Balanced

All of this talk of achieving more equal super balances is well and good, but how do you practically achieve it?

Particularly if one member of the couple is on a much higher salary and is therefore getting much larger employer super contributions made into their account and naturally building a larger balance.

Well, one fairly fast and effective option that I looked at here is the downsizer contribution, which has some unique benefits for moving quite large amounts into super (up to $300,000 for each member of the couple).

However, it requires a property sale of a long-term principal place of residence so it won’t be useful for everyone.

Spousal Contribution Splitting

Another long-term way to move towards more equal super accounts is to use spouse contribution splitting.

It is a bit clumsy but it allows one spouse to effectively give up to 85% of their concessional (pre-tax) contributions a year to the other.

There are some rules to consider: the “giving” spouse can be aged up to 75, but the receiving spouse must be either younger than 60 or aged between 60 and 65 and not retired.

It also only applies to concessional contributions—which include employer super guarantee contributions, salary sacrificed contributions or personal tax-deductible contributions.

It is also a fairly gradual process because of the fairly low sums to be split so it will be more effective if used over a longer period.

Additionally, it requires a new form to be filled out each year by the giving spouse requesting a percentage of their previous year’s concessional contributions be transferred to their spouse’s super.

Maximising Concessional Contributions

Another idea is to make sure that the spouse with the lower super balance maxes out their concessional contribution cap each year as long as the couple can afford to do it.

That might mean making additional pre-tax contributions through salary sacrifice up to the current pre-tax contribution limit of $32,500 a year.

Another strategy if there is a larger amount of spare cash from an inheritance or other source is to make non-concessional contributions into the account of the spouse with the lower balance.

Using this strategy is also beneficial in an estate planning sense because the “after tax” nature of the contributions means there is no potential tax charge for non-dependent children after death compared to pre-tax contributions.

The cap is more generous, too, being up to $130,000 a year and under the “bring forward” provision up to $390,000 in one year, so a bigger difference can be made more quickly.

Getting Hold of the Money

The big problem, of course, is laying your hands on the money in the first place but if family investments can be rearranged to help to balance the two super accounts it will really help to reduce tax bills in retirement.

The final method we will look at to equalise super balances works best when the spouse with the higher balance has reached a condition of release for their super—either by retiring at or having reached 60.

That spouse is then free to withdraw a lump sum from their super and recontribute it into their spouse’s lower balance account through an after tax, non- concessional contribution.

As with the earlier example there are some estate planning benefits for making an after-tax contribution and the receiving spouse also needs to be aged under 75 to receive the re-contribution.

Of course, the non-concessional contribution will have to fall under the limits of up to $130,000 a year, or $390,000 using the “bring-forward” provisions.

Because the super re-contribution was made after tax, the potential 15% tax on that amount as an inheritance for non-dependent children has been helpfully removed.

Relationship Strength Key

Naturally all of these methods of balancing up super balances assume a strong and enduring relationship between the spouses, with any issues beyond that obviously requiring a lot more thought to go into the rebalancing.

Another factor to consider could also be the beneficiary nominations for each super account.

If each spouse is leaving their super to the other there are no real problems, although if the family is mixed and any adult children are named as beneficiaries, this also needs to be considered in arranging a more equal balance between the two accounts.

At the end of the day though, by getting super balances closer to being equal, the couple have very effectively minimised the amount of tax they pay as a household and maximised their tax-free retirement income.