Splitting your super

Super splitting is a sensible, simple and strategic way of dividing contributions, managing the transition into retirement and maximising income. It involves transferring concessional or tax deductible contributions from the account of a fund member to their partner.

It is particularly beneficial where there is a reasonable age gap of around five years or more, or where there is a difference in incomes between the partners. It is also a great way of building up the super balance of a partner on a lower income, such as a spouse who is out of the workforce for several years raising children.

Splitting can also be used to obtain early access to the super of the partner who reaches pension age first. This can help preserve accumulated funds as the working partner continues to contribute.

Splitting contributions to a younger spouse also improves your Centrelink position. Although it is not an instant fix, it can be valuable if used as part of a long-term strategic plan for retirement.

Super splitting is done by completing a short form that is supplied by the pension provider, or through a certified financial adviser. Couples should be aware of amounts that cannot be split, including benefits rolled over from another fund and lump sums paid from a foreign superannuation fund.

Supercharge your super

An individual’s superannuation is typically one of their biggest assets along with their home. So while it is natural to start thinking about how you can boost your superannuation balance leading up to retirement, putting in the effort well before then can make a big difference to your retirement lifestyle. Below are four simple ideas to supercharge your super:

Make additional contributions: Although employers are legally required to contribute to your chosen superannuation fund, relying on these contributions alone means it can take quite a while for an individual’s super balance to grow. Making additional, voluntary contributions, also known as salary sacrificing, is a popular way to boost an individual’s superfunds. With salary sacrificing, individuals can contribute a maximum of $30,000 if they are under 50, or $35,000 if they are over 50 years old.

Pool resources with your partner: Combining your super with a partner in a joint SMSF can provide an individual with an even larger amount of money to invest. Combining super also means you may pay less in fees, as one set of fees typically covers all the members of an SMSF.

SMSF tax benefits: There are quite a number of tax advantages for some asset classes or investments held within an SMSF. SMSF trustees also have the ability to manage the taxation implications of investment transactions on member accounts.

Shop around: Because an SMSF usually offers more investment options than a managed superannuation fund, individuals can often boost their super by shopping around for better returns. Although cash, property and shares are the most popular asset classes for SMSFs, there are other options such as investing in other listed securities or managed funds, bonds or warrants.

Beware segregated pension traps

Applying the segregated pension method for an SMSF can result in cash-flow issues caused by the division of earnings and expenses.

While the decision to segregate assets in an SMSF into pension and accumulation mode may be due to tax purposes, there are still a range of important issues to consider.

Bank accounts are usually the biggest issue with segregating an SMSF into pension and accumulation pools. If an SMSF trustee has one account, they must be able to keep track of everything since every dollar earned from every asset will go into that one bank account. However, two separate bank accounts can also be problematic. Having two accounts can make it hard to determine how you direct the right income to the right bank account.

Since dividends are paid to bank accounts, SMSF trustees may also have to provide the share registry with two accounts. This means two different broking accounts are required for shares from the same company.

The benefits of a binding death nomination

Signing a binding death nomination can help your beneficiaries make the most of tax savings in super.

A binding death nomination compels your super fund’s trustees to direct your super to the chosen dependent beneficiary upon your death. It also means your beneficiaries can receive any assets within the tax-effective structure of super. This is especially relevant for surviving spouses, so they can continue to receive tax-free income streams or superannuation payout upon death.

Those who do not sign a binding death nomination will most likely have their super passed to the beneficiaries at your will’s direction, which can result in assets falling outside the taxation structure of super.

Those who do elect to sign a binding death nomination will need to update it every three years unless they have a non-lapsing nomination. Non-lapsing nominations are available in some newer trust deeds, and can be helpful for looking after dependent children.

Splitting superannuation

When a marriage or de facto relationship breaks down, any property can be divided between the parties. Under the Family Law Act 1975, superannuation is also treated the same way.

Parties must enter a superannuation agreement or obtain a court order to allow the splitting of their superannuation. A spouse may seek a court order when the parties cannot reach an agreement about how to split super.

The trustee is obligated to pay an amount or a percentage of the member’s super to the non-member spouse, so it is essential for the non-member spouse to provide the trustee with advice on payment details. Otherwise, the non-member may be required to pay interest on their half of the super in the fund, or the trustee will transfer the benefits to another fund commissioned by the non-member spouse.

A payment flagging arrangement recognises a member’s fund may be the subject of a super split in the future and puts a flag on their account. Both parties may want to consider this arrangement, as it prevents the trustee from making any payments out of the superannuation interest or transfers to other funds until the flag is lifted.

Avoiding SMSF death benefit disputes

Recent family disputes over superannuation death benefits carry an important warning to current SMSF trustees.

The disputes have highlighted the need for trustees to have appropriate and binding death-benefit directions planned while members are still alive, in order to reduce the risk of a dispute arising. When there are clear death-benefit directions, surviving trustees have no choice but to comply with them.

Small business owners who use a self-managed super fund can be particularly vulnerable to these types of disputes, especially those involved in a family business. This is because many small business owners hold their family business premises in their family self-managed fund, and any dispute over death benefits can lead to the forced sale of the small business premise.

To avoid the possibility of disputes arising over superannuation death-benefits in a small businesses, owners should nominate a successor trustee or successor director. This can help assure the right ownership and control of their assets is passed on to their intended superannuation beneficiaries.

Owners should also openly discuss with their family what they intend to do with their super death benefits. Establishing strong personal relationships within the family is one of the best ways to avoid a family dispute in the future.

Refund of excess non-concessional contributions

The Government recently made changes to excess non-concessional contributions, bringing the treatment of excess non-concessional contributions into line with the treatment of excess concessional contributions.

The changes eliminate double taxation, where individuals were being taxed at the top marginal tax rate even though they paid income tax on contributions prior to making contributions to their fund.

Members aged under 65 are allowed to contribute up to $180,000 each year to their super fund using after-tax funds known as non-concessional contributions. In addition, they can bring forward two years’ worth of contributions. However, they must not exceed a maximum of $540,000 worth of contributions over a three-year period.

Under the old rules, non-concessional contributions that exceeded those caps were taxed at the top marginal rate.

The new rules provide members, who exceed the non-concessional caps on or after 1 July 2013, with the option to release the excess plus 85 per cent of the associated earnings amount. This is the amount the super fund includes on the investments made with the excess contributions.

By making the election, members can avoid paying excess non-concessional contributions tax. The individual’s assessable income will include the associated earnings amount with a 15 per cent non-refundable tax offset. Members that choose to keep the excess contributions in their fund are taxed at the top marginal rate.

Where a member’s fund modifies their contribution information, or a member changes their deduction for personal super contributions, the ATO may amend their excess non-concessional contributions tax assessment and refund their excess contributions.

SMSF’s and non-arm’s length income

Self-managed super funds and related parties must transact on arm’s length terms. This ensures that both parties are acting in their own self-interest and will not succumb to any pressure from the other party. The true market value of an asset should always be reflected in the purchase and sale price of assets.

Members need to be aware of any income that can be classified as non-arm’s length to avoid being taxed at the highest marginal rate.

A potential non-arm’s length hazard is a limited recourse borrowing arrangement (LRBA). Under an LRBA, a member can borrow money to purchase an asset and receive the beneficial interest, but the legal ownership of an asset is held on trust by a related party for the SMSF member.

Problems arise when the alleged loan is not at commercial rates. For example, the ATO found two members of a self-managed super fund had a loan with zero interest. Consequently, the income acquired by the SMSF member as a beneficiary of the holding trust was considered to be non-arm’s length and they were subject to 45 per cent tax.

SMSF’s under scrutiny for ‘loose’ loans

The ATO has reiterated it will be investigating self-managed super fund members who have an estimated $600 million in related-party loans for shares and property in their funds.

Some members are taking out loans with a related party, which refers to friends, associates or family, on terms more favourable than what might have been attained from a bank. The tax office is concerned that these loans are not being made and maintained on a strict commercial basis and so, are breaching regulations. The ATO is willing to assist members who are caught up in such arrangements and resolve any issues.

There are certain characteristics that can help lenders identify these inappropriate loans:

– no compensation.

– no repayments.

– a single lump sum when the loan term ends.

– the loan amount provided for 100 per cent of the value of the assets purchased.

– the lender has not sought personal guarantees from the members of the fund.

Revise your SMSF investment strategy

Self-managed super fund members should revise their strategy regularly to ensure it continues to reflect their circumstances and the fund’s investment objective. A self-managed super fund requires a clear, well-documented investment strategy to be successful. Characteristics of these SMSF investment strategies include:

– ability to pay benefits when members retire. A member must be able to maintain their standard of living when they leave the workforce.

– consider member needs and personal situations. The strategy takes on board the member’s age, their expected retirement date and identifies an appropriate investment option.

– liquidity of the fund assets. It is crucial for members to ensure they have sufficient cash to pay fund expenses.

– identifies the likely returns from investments to manage the risks associated with the investments.

– Adequate diversification of investment to help with handling the risks and returns.