The Federal Government continues to add incentives to the superannuation system to make it more attractive for people to save for their retirement and the latest measures will offer some real financial planning opportunities for couples.
A bill introduced into Federal Parliament last month will allow you to split your superannuation contributions with your spouse in 2006 and delivers on an election promise made back in 2004.
For couples where one spouse does not work this initiative will be attractive because it will allow the non-working spouse to access their reasonable benefit limit.
In superannuation the government places limits on how much you can accumulate under the concessional tax regime of superannuation. For the 2005-2006 year the reasonable benefit limit (RBL) for lump sums is $648,946 while if you opt to take at least half your super in a pension form your RBL is $1.29 million. So you can contribute that amount into super and enjoy the lower tax rates that apply to super. However, if you exceed those limits then the benefits will be taxed at the top marginal tax rate when they are paid as a lump sum.
It is not an uncommon situation for one spouse to have built up considerable amounts in super over a lifetime of work while the other may have little money in super. For example before preservation rules were changed it was not uncommon to hear of women cashing out their super when they stopped work to start a family to pay down the mortgage or satisfy some other immediate financial need.
Subject to the legislation being passed - and the regulations are being circulated for industry feedback until November 11 - this new measure gives couples the chance to equalise their super account balances.
People who will find this most attractive will be couples where one person is almost exceeding their RBL limits - or the projections are showing they will in a few years time. Previously that may have forced people to stop contributing to super and look outside superannuation for other investment vehicles.
Now they will be able to notify their super fund - subject to the fund deciding to offer the service - and have up to 100% of their contributions from January 1 2006 paid to their spouse's super account.
The way it will work will be after the end of each financial year you can request that your contributions be split with your spouse. The government has brought forward the start date by six months - it was originally intended for June 30 next year. Now what sounds like a simple idea will require some proper administrative systems to be put in place by super funds. Some funds may decide to not offer it - or at least not initially - in which case the ability to split super contributions will become another criteria for choosing between super funds.
For self-managed super funds this will be another example of where small individual funds will be able to move quickly and relatively easily to take advantage of the change of regulations. People with DIY super funds will need to check that their trust deed allows it and if not then arrange for an amendment to be made.
While the biggest impact of this change is likely to be among higher income couples there are also potential advantages for low income people to consider using the new splitting rules.
Under the super rules there is a tax-free amount of $129,751 that can be withdrawn from super. If you have your super in two accounts then both people will be able to withdraw that amount without paying any tax. So a couple can effectively withdraw $260,000 tax-free as a lump sum.
The new rules do not apply to same-sex couples.
