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For as long as I knew the mechanism existed, I have been a vocal advocate for advisers and clients to utilise superannuation contribution splitting to achieve equity within couples. This is because the gender superannuation gap is real, and it won’t be undone without consistent and meaningful corrective action.
Now, though, contribution splitting may be about to get super sexy (pun absolutely intended) thanks to the Federal Government’s new policy to introduce a new tier of tax within superannuation. This would affect balances above $3.0 million and would come into play from 1 July 2025 (which may also require the Government to be re-elected in 2025).
What does the new policy mean?
If your super balance is above $3.0 million going forward, your fund’s earnings won’t be taxed entirely at the concessional 15% tax rate. Instead, there will be a new component that will be taxed at 30%. Still very pretty compared to potential marginal tax rates of 30% or 45% personally (once the new stages come in during 2024), but nevertheless it seems like a whopper when compared to the status quo.
What does this have to do with equity?
There are 2 major drivers of the gender superannuation gap that exist currently:
- Women taking time out of the workforce to carry / birth and care for families (this can also apply to caring for older generations)
- The gender pay gap, that is then directly applied to the money going into the super system
Contribution splitting is a brilliant way for couples and families to redirect the super contributions of the higher earning family member during times of financial imbalance (you can read about my own experience with this here). Without having to stump up extra money, couples can ensure whoever is stepping away from the workforce (often a woman) is not financially penalised for this brilliant household contribution.
We have a near 100% uptake of this strategy with clients at Rising Tide when it is discussed, because it is simple and easy to wrap your head around.
With this new super policy looming, I firmly believe this strategy is about to become mainstream –and I am more than ready for it.
How exactly does super contribution splitting work?
Here’s a basic example.
James (52) has $4.0 million in his super and Laura (51) has $1.5 million.
Under the new super policy, the portion of James’ earnings relating to the $1.0 million above the gap would now be taxed at an additional 15%. There would be no changes to how Laura’s super fund is taxed.
However, what if James and Laura had been working with financial planner Katherine in previous years, and had consciously been rebalancing their super contributions to be equitable?
In this scenario, James and Laura each have $2.75 million in super. Now, neither of them is subject to the additional tax on earnings.
The maths of this possible change will no doubt be a clear driver for couples (particularly young couples with time on their side) to want to ensure they do not end up with lumpy and unbalanced super funds, therefore subjecting themselves to unnecessary tax.
Contribution caps can be tough to navigate when it comes to getting money into the super system and this is one reason it’s beneficial to be thinking about your super from a young age. People can quite literally leave it too late and not have enough room within the system to wiggle around.
Making sure there’s balance in a couple will need diligence, particularly if you’re starting with an existing imbalance in super balances and/or earnings and adjusting it will take several (or many more) financial years.
Like so many things relating to equity, reducing the gender super gap makes sense socially and morally, and it now also makes very clear economic sense, providing a real opportunity to tackle the issue in this generation.
If you would like to speak with one of our Rising Tide advisers about how this could work for you, you can book in a chat here.