ONE of the least understood giveaways in super had its eligibility greatly widened in July yet many people have missed it: the low income spouse co-contribution tax offset allows higher income person in a couple to make a $540 contribution to their spouse super and then claim it as a tax offset.
The eligibility criteria moved from not making more than $10,800 a year to not making more than $37,000 - it will open the arrangement to millions of couples around the country.
It was announced in the 2016 budget and came into effect on July 1 this year.
The spouse tax offset is designed to help boost the super of people who take time out of the workforce, particularly women. In their budget papers, the government note "many working Australians, especially women, take time out of the workforce to raise children or care for a relative. Many return to work part-time.
This contributes to women having lower superannuation balances. In 2013-14 the average superannuation balance for a woman was around 74 per cent of the average superannuation balance for a man".
Statistically, women also live longer than men and require more retirement savings to support a longer retirement making the spouse tax offset a great tool to help close the retirement needs gap.
How does it work?
A person makes an after-tax super contribution into their spouse's super account. A special tax benefit called the spouse tax offset is then claimed for the super contribution in the tax return of the spouse who made the contribution. The tax offset is calculated at a rate of 18 per cent of the contribution made, up to a maximum tax offset of $540. Thus, spouse super contributions above $3,000 do not attract more than the maximum $540 tax offset.
There are however eligibility rules that need to be met.
First, the spouse receiving the super contribution can't have assessable income, total fringe benefits and reportable employer super contributions greater than $37,000 for their spouse to receive the full tax offset, and income of no more than $40,000 for their spouse to receive a partial tax offset.
The receiving spouse must also be below the after tax contribution cap threshold, which currently sits at $100,000 per year ($300,000 over three years using bring forward provisions for those under 65) and must also have a super balance less than $1.6 million. Usual age based super contribution criteria also apply such that the receiving spouse must be under 65 years of age or under age 70 and meet the work test.
In the past, the main sticking point of this benefit has been the receiving spouse earning more than $10,800 and knocking out eligibility for the 18 per cent tax offset.
The 2016 census reported that approximately 14 per cent of Australians earns less than $10,800 per year, making the reach of the spouse tax offset limited. However, with the income threshold increased to $37,000, the spouse tax offset now covers over 45 per cent of Australians over the age of 15.
What is the impact?
In other words, the spouse tax offset now is available to 8.5 million Australians compared to only 2.6 million pre-July 2017, subject to other eligibility criteria being met.
The government forecast this tax measure will cost $3 million per year in lost tax revenue.
Sydney financial planner Peter Lambert says: "it's a big free kick and although little known, should be widely used by couples around Australia. For a $3000 super contribution that attracts the full $540 tax offset, that's effectively a guaranteed return of 18 per cent on the contribution, even before it gets invested in super".
Given the recent limited based changes to super that result in less tax benefits in super for those with over $1.6 million in retirement, it makes sense for couples to try and equalise super account balances throughout their working lives.
The spouse tax offset supports this by encouraging super contributions into the lower income spouse, who typically would have a lower super balance due the absence/lesser amount of employer contributions.
The tax offset is not limited to the situation where one spouse earns significantly more than the other.
Sydney accountant Luke Star notes: "both spouses can earn less than $37,000 and the spouse tax offset still works. Assuming other eligibility criteria is met, as long as the spouse who makes the contribution has tax payable of more than $540, the spouse tax offset will apply".
Life insurance costs
Life insurances can also eat into the balance of the lower income earners. Mr Lambert says: "in the situation of a family with a few kids and a mortgage, the appropriate level of life insurance cover can be a few thousand dollars per year premium and usually paid from super to reduce personal cash flow impacts.
"If one spouse is working reduced hours due to caring for children, this can result in insurance premiums eating into their super balance and if not addressed, can significantly deplete their super balance over a couple of years". In cases like this, the spouse tax offset can work a treat as it tops up the lower income spouses super account and also gives the other spouse a tax break.
Another trigger that can be pulled to boost a spouse's super balance is spouse super contribution splitting whereby up to 85 per cent of a spouse's employer super contributions can be moved to their spouses super account.
We are not even half way through the first financial year where the increased reach of the spouse tax offset so there is plenty of time to act. With term deposit rates sitting at below three per cent, 18 per cent guaranteed return on a super contribution doesn't sound like a bad idea.
James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au.