Superannuation Contribution Splitting with a Spouse

Many of the super reforms which commenced on 1 July 2017 aim to limit access to superannuation tax concessions based on your superannuation balance. As a result, strategies which equalise superannuation balances between members of a couple can be very effective at maximising access to superannuation tax concessions.

Spouse contribution splitting is an important strategy going forward as it allows couples to equalise superannuation balances by splitting up to 85% of concessional contributions to a spouse with a lower superannuation balance. However, it is a long-term strategy that often needs to be implemented over a number of years to be really effective.

A summary of Spouse Contribution Splitting Rules:

  • Only concessional contributions (super guarantee, salary sacrifice or personal deductible contributions) made in the immediately preceding financial year can be split from one member of a couple to another. After tax contributions and existing superannuation balances cannot be split.
  • The maximum amount that can be split is the lesser of:
    • 85% of concessional contributions made in the previous financial year1, and
    • The concessional contributions cap for that financial year.
  • The receiving spouse must be either:
    • under preservation age, or
    • between preservation age and age 65, and must declare they do not satisfy the ‘retirement’ condition of release.
  • For concessional contributions cap purposes, a contribution that is split to a spouse’s superannuation account only counts towards the originating spouse’s concessional cap.
  • For personal tax deductible contributions, clients must lodge a valid notice and have it acknowledged before they split contributions.

Helping your children financially:  Loans versus Gifts

The high cost of housing means that periodically we receive enquiries about how best to best provide adult children with financial assistance. Most parents think the best way to help is if they gift money to children. However, lawyers generally suggest that the best course of action is not to gift the money. Why? Because if the child divorces or, less likely, goes bankrupt, much or even all of the money gifted is often lost.

Providing you are not jeopardising your own long term financial security, it is understandable that you might like to help your children financially. You should protect the money in case:

  • they divorce
  • they go bankrupt
  • they develop a drug problem
  • they suffer a severe mental condition
  • your relationship with them breaks down
  • you unexpectedly run short of money yourself in your old age

Example 1. Gifting resulting in sad parents

Mum and dad give their daughter, Sue, $500,000 to buy a unit. She then marries Chris. Ten years later Sue and Chris divorce. To simplify things, assume that the unit is still worth $500,000 and is the only asset of the marriage. The Family Court awards 50%, $250,000, to Chris. The Family Court is generally not interested that the money was a gift from Sue’s parents.

Example 2. Lending by smart parents

Sue’s parents lend $500,000 to their daughter. Sue signs a legally prepared Loan Agreement and purchases a unit with the money. She marries Chris but ten years later they divorce. Again, assume the house is still worth $500,000 and is the only asset they have. The Family Court is shown the Loan Agreement and will likely order that Chris gets nothing because the assets of the marriage, after the loan from Sue’s parents is repaid, are nil. This also enables Sue’s parents to help her post the divorce.

Lawyers can prepare loan agreements that comply with the requirements of the Family Court. Homemade loan agreements may not work and generally carry less weight with the Family Court or the Bankruptcy Court.

The conclusion is that it is generally best not to ‘give’ your children money. It is preferable to ‘lend’ them money ‘payable on demand’ and you should get a lawyer to prepare the loan document.

What is China’s Belt and Road Initiative also known as “One Belt, One Road”?

China’s Belt and Road Initiative, commonly referred to as either One Belt, One Road (OBOR) or Belt & Road Initiative (BRI), is President Xi’s ambitious foreign and economic policy designed to strengthen Beijing’s economic leadership through a vast program of infrastructure building to connect China’s less-developed border regions with neighbouring countries and extending all the way to Europe, eastern Africa and down to Indonesia.

Peter Cai from the Lowy Institute in his Understanding China’s Belt & Road Initiative says that “On land, Beijing aims to connect the country’s underdeveloped hinterland to Europe through Central Asia. This route has been dubbed the Silk Road Economic Belt. The second leg of Xi’s plan is to build a 21st Century Maritime Silk Road connecting the fast-growing Southeast Asian region to China’s southern provinces through ports and railways”.

One Belt One Road will be implemented over a decade or more and while some of China’s neighbours may be wary of China’s intentions, China’s ability to finance projects will likely be attractive and give China leverage over recipients of these loans. Chinese-made high-end industrial goods such as high-speed rail, power generation equipment, and telecommunications equipment are likely to be used widely in neighbouring countries, most of which are keen for assistance to spur economic development.

Given China’s is by far Australia’s largest trading partner, this policy initiative is important to us for economic and strategic reasons. If the policy is successful it will strengthen China’s economy, which should be good for us, but will also make it an even more powerful global power. The direct impact on Australia could be sizeable. BHP recently said that about 400 “core projects” from the Belt and Road Initiative would cost an estimated $US1.3 trillion to deliver, boosting Chinese steel production over the next decade.  That would obviously be good for Australia’s iron ore and metallurgical coal exports.

Counting the financial cost of a curve ball

Here’s a confronting question: what would you do if the main income earner in your household could no longer bring in an income due to illness or injury? Do you have a Plan B? Many people don’t. That’s where insurance comes in.

Curve balls. They’re unexpected, often deceptive and it’s impossible to predict their trajectory. That’s why they’re so devastating – in sport and in life. There’s some interesting data now available about the kind of curve balls that can impact your life, your finances and your retirement.

The headline figure is this: one in three Australians could be disabled for more than three months before turning 65. If you combine this with another startling fact – that 60% of Australian families with dependents will run out of money if the main breadwinner can no longer bring in an income – you can see the problem. Curve balls are pretty common, but many people are not prepared for them.

With the mortgage to pay, school fees to fund and day-to-day living expenses to meet, you could run down your savings very quickly and face financial difficulty.

The table below shows what’s at stake in terms of potential earnings to a retirement age of 65. For example, if you are currently 45 and earn $80,000 per annum, you could expect to earn around $2.15 million over the next 20 years. That’s worth protecting.

Current income (per annum)Age now
25354555
$40,000$3,020,000$1,900,000$1,070,000$460,000
$60,000$4,520,000$2,850,000$1,610,000$690,000
$80,000$6,030,000$3,810,000$2,150,000$920,000
$100,000$7,540,000$4,760,000$2,690,000$1,150,000

Assumptions: Income increases by 3% per annum. No employment breaks. Figures rounded to nearest $10,000.

What kind of Plan B do you need?

The last thing you need to worry about when you’re dealing with a curve ball is your finances.  That’s where insurance comes into its own. It’s a well-known saying that you only realise the value of insurance when you need it – and you don’t have it.

Taking out Income Protection insurance could provide you with a monthly benefit of up to 75% of your income to replace lost earnings while you recover. Most Income Protection policies offer a range of waiting periods before you start receiving the insurance benefit (with options normally between 14 days and two years). You can also choose from a range of benefit payment periods, with cover generally available up to age 65.

Other things to consider

  • Income Protection insurance premiums will generally be lower if you choose a longer waiting period and shorter benefit payment period.
  • Income protection policy premiums are normally fully tax deductible.
  • If you don’t have sufficient cash flow to fund the Income Protection premiums, you may want to arrange the cover in superannuation, where the cost will be deducted from your account balance.
  • Other curve balls you may want to insure for include critical illness (such as cancer and stroke), total and permanent disability and death. These curveballs can be covered by different types of life insurance, which you may want to consider.

 

Insurance Companies actually do pay most Claims!

There is a degree of scepticism as to whether insurance companies pay legitimate claims but new data released by regulators APRA and ASIC shows that more than 90% of life insurance claims lodged during 2016 (this covers Life, TPD, Trauma & Income Protection) were accepted by life insurance companies. The data revealed that of the 103,100 claims finalised in 2016, 95,000 or 92.1 %, were accepted (paid). 8,100 or 7.9% of claims were declined according to the data which was released as an industry-aggregate. No detail for individual insurers has been released.

ASIC has reportedly embarked on a major review of the direct life insurance sector after it found policies sold through that channel had higher claims denial rates compared to policies sold through advisers and group insurance policies.

 

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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