Contribution splitting is a feature of Self-Managed Super Funds (SMSFs) that allows a member to split their contributions with their spouse. This can be a useful strategy for managing superannuation balances and maximizing tax benefits. In this guide, we will cover the essential aspects of contribution splitting in SMSFs.
What is contribution splitting in SMSFs?
Contribution splitting is a strategy that allows an SMSF member to split their concessional contributions with their spouse. Concessional contributions include employer contributions, salary sacrifice contributions, and personal contributions that are claimed as a tax deduction. The contributions can be split on a percentage basis or a dollar amount basis.
Why consider contribution splitting in SMSFs?
Contribution splitting can be a useful strategy for managing superannuation balances and maximizing tax benefits. By splitting contributions with a spouse who has a lower superannuation balance or income, it may be possible to reduce the tax payable on the contributions and even out the superannuation balances.
The benefits of contribution splitting in SMSFs include:
- Tax benefits: By splitting contributions with a spouse, the member may be able to reduce the amount of tax payable on their contributions. This can be particularly beneficial if one spouse has a lower income or a lower superannuation balance.
- Balancing superannuation balances: Contribution splitting can help to even out the superannuation balances between spouses, which can be important for couples planning for retirement.
- Maximizing the $25,000 concessional contribution cap: Contribution splitting can help members to maximize their concessional contributions up to the $25,000 cap. This is particularly useful for members who are unable to make large contributions in a single year.
How to split contributions in SMSFs?
To split contributions in an SMSF, the following steps must be taken:
- Check the SMSF trust deed: The SMSF trust deed must allow for contribution splitting.
- Eligibility requirements: The receiving spouse must be under the preservation age or between their preservation age and 65 years old and have an accumulation account in the SMSF.
- Lodge a notice: The member must lodge a valid contribution splitting notice with the SMSF trustee. This notice must be lodged within 28 days of the end of the financial year in which the contributions were made.
- Determine the split amount: The member can split up to 85% of their concessional contributions made in the financial year.
- Implement the split: The SMSF trustee must implement the contribution split by transferring the nominated amount to the receiving spouse’s superannuation account within the SMSF.
- Reporting requirements: The SMSF trustee must report the contribution split in the member and receiving spouse’s annual statement.
Final Thoughts
Contribution splitting in SMSFs can be a useful strategy for managing superannuation balances and maximizing tax benefits. However, it is important to ensure that the SMSF trust deed allows for contribution splitting and that all eligibility requirements are met. It is also important to lodge a valid contribution splitting notice within 28 days of the end of the financial year in which the contributions were made. If you are considering contribution splitting in your SMSF, it is advisable to seek professional advice from a financial adviser or SMSF specialist. To know more please contact us today.