One of the more important strategies that has emerged from the newly legislated Division 296 superannuation tax laws is the importance of planning between spouses.
While it has often been seen as a good idea to equalise super accounts as much as possible between spouses anyway, this strategy has now become a lot more important when having very unequal super accounts can lead to higher taxes.
To use a very crude example, two people in a couple with $2.5 million super accounts each won’t pay any Division 296 tax.
But if one of them has a $5 million super account, unless they withdraw a large sum from their super account they will be paying this tax for a long time.
What Happens When a Spouse Dies?
Another thing to consider is what would happen if one member of a couple dies, potentially pushing the surviving spouse into Division 296 tax territory.
It used to be that the death of a partner simplified super planning but under the new rules it can do the opposite.
If not prepared for appropriately, the automatic transfer of a super balance upon the death of one spouse could push the bereaved partner over the $3 million threshold, triggering lifelong higher taxes, forced payout of super funds, or the forced sale of illiquid assets to align with death benefits payout and/or tax requirements.
As I pointed out ++here++, fewer than 100,000 Australians will be hit by this new super tax but it is still worth considering and planning around for your specific family circumstances.
Equalising as much as possible superannuation savings between two spouses has a number of other benefits apart from saving tax.
The most notable of these is that women – who often have lower balances due to career breaks and salary inequality – are statistically likely to live longer and may really need higher super balances.
How to Equalise Accounts
So, how do you go about moving towards more equal super balances?
One great way is to use the government’s co-contribution scheme to maximise the super balance of a spouse who is not working for a while or is on a lower income.
If one spouse is earning less than a total of $62,488 in a year they can claim a partial co-contribution or below $47,488 to get the full $500 government contribution which is made when you contribute $1000 to super.
The co-contribution is automatically paid into your super account after you lodge your tax return, provided your super fund has your tax file number.
That amount mightn’t seem like a lot but it can make quite a difference in covering workplace gaps to ensure one partner doesn’t get left behind when you consider years of compounding future returns.
Salary Sacrifice Strategy Might Change
Another strategy is to salary sacrifice, which is a good strategy as well because it reduces income tax at the same time as bolstering the super account.
Because tax is applied to individuals but spouses are by definition part of a household, they are free to arrange their finances to make this strategy work.
For example, it might make sense for the spouse on the lower income to salary sacrifice, using the cash flow from the higher paid spouse to cover the relatively small amount of income forgone.
This might mean a lower income tax saving in the short term but more equal super balances in the longer term.
As for preparing for the death of one spouse which might breach the indexed Division 296 limits of $3 million (for a 30% investment return tax) or $10 million for a 40% tax, there are a few options.
One might be to do nothing and simply pay the tax, another might be to withdraw part of the superannuation account from the deceased partner and invest it outside super.
