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Contribution Splitting in a SMSF

Exploring Concessional Contribution Splitting Strategies for the 2022-23 Financial Year

Splitting concessional contributions among members or spouses can be an effective strategy, provided you derive the following benefits:

  1. It generates a tax-free portion for the receiving spouse – akin to a re-contribution strategy.
  2. It is tax-deductible for the contributing spouse (subject to PSI or the 10% income test) if they are self-employed.
  3. It can enable early access to pension payments and Transition to Retirement (TTR) pensions for the receiving spouse, particularly if they are older than the contributing spouse.

Understanding the Mechanism:

To illustrate the process, let’s consider an updated example for the 2022-23 financial year:

Tony, 51 years old, and his wife Amanda, 55 and working part-time, are both members of an SMSF. Tony wishes to split his super (concessional contributions) with Amanda so she can initiate a tax-free pension, as she has reached her preservation age.

In the 2022-23 financial year, Tony contributes $27,500 (reflecting the concessional contributions cap) and claims the split in the subsequent 2023-24 financial year.

Tony (self-employed) contributes $27,500 (2022-23 FY) Less tax: $4,125 Contribution applied to spouse’s account: $23,375

The super fund or accountant applies 85% of the contribution (minus 15% super tax) as a contribution for Tony, who makes the contribution. Amanda receives it and records it in her member statement as a tax-free component.

Since SMSFs primarily operate using a pooled strategy, there is no money transferred to another fund within an SMSF. Instead, it is simply recorded as received by the spouse, in this case Amanda, on her member balance as an amount in the tax-free component of her member balance for the financial year where the split was applied.

When Amanda turns 60, she can commence a TRIS or TTR Pension with tax-free money. Tony claims a tax deduction for the contribution split, while Amanda can draw an income sooner from a tax-free source, which further creates a succession benefit for their adult children.

Key Conditions to Remember:

  1. The contribution to be split must be applied to the following year from the year it is received.
  2. The receiving member must be under age 65 and not retired.
  3. Only 85% of the contribution (excluding super tax of 15%) may be applied to the receiving member.
  4. You can only split concessional contributions, both employer-paid and salary-sacrificed amounts.
  5. A contribution split form must be received by the super fund.

By understanding these updated details and conditions, you can maximize the benefits of splitting concessional contributions among SMSF members or spouses for the 2022-23 financial year.

 
Warning: Always seek advice on these arrangements as they are complex to administer.

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