SMSFs practitioners looking to use contribution splitting to create equal balances among fund members should remind them it is an easily accessible strategy, but will not produce significant results unless carried out on a long-term basis.
Heffron head of education and content Lyn Formica said contribution splitting was often dismissed by accountants and advisers as it could only be carried out on 85 per cent of a concessional contribution, which was only $27,500 in the last financial year.
However, Formica noted the rules around creating a contribution splitting strategy contained few limits and only required that a fund member could make a contribution.
“If you remember the rules to do a contribution split, the receiving spouse can’t be retired or over 65, but there are no restrictions on the size of the balances for either of them,” she said at the recent Heffron Super Intensive Day.
“There’s also no restrictions on the age or the retirement status of the contributing spouse. They just need to be able to get contributions in, so they have to be young enough to be able to get contributions in, but it doesn’t matter if they’ve subsequently retired.”
She gave the example of Kim and Terry, who were both 45, but with very different balance sizes – $800,000 and $200,000 respectively – with both now in a position to start maximising their concessional contributions.
“The question then is, is it worth doing a contribution split if they are putting in maximum contributions to try and even up their balances?” she said.
“With their total superannuation balances, if they do nothing, Kim’s balance makes up a significant portion of their total superannuation at the start and it stays that way,” she added, noting Kim would have still have 70 per cent of total super funds, which had grown from $1 million to around $3 million at the end of 20 years.
“If we were to implement a contribution splitting strategy where 85 per cent of Kim’s concessional contributions are split across to Terry in the following financial years, Kim’s balance falls by 20 per cent.
“At the moment, Kim’s balance makes up to 70 per cent of the total super pool. We could get that down to 50 per cent by doing a contribution splitting strategy.
“It can make a significant difference, but it took 20 years. Even after 10 years there was some benefit as Kim went from 70 per cent to 60 per cent of the pool.
“Even that has made a difference, but it’s a long-term strategy and your clients are not going to get any instant benefits if they do it for one or two financial years.”
