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, which allows higher-income person in a couple to make a $540 contribution to their spouse’s super and then claim it as a tax offset, has been tripled.
The eligibility criteria changed from the lower earner not making more than $10,800 a year to not making more than $37,000 — a change that could open a useful tax break to millions of couples.
The change was announced in the 2016 budget and came into effect on July 1 this year — but it has been lost in the torrent of commentary around super “cap” changes.
The spouse tax offset is designed to help boost the super of people who take time out of the workforce, particularly women. In the budget papers, the federal government notes “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”.
At the centre of the new policy is the fact that women have lower super balances. In 2013-14 the average super balance for a woman was around 74 per cent of the average balance for a man”.
Statistically, women also live longer than men and require more savings to support a longer retirement, making the spouse tax offset a great tool to help close the retirement needs gap.
So 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. And so spouse super contributions above $3000 do not attract more than the maximum $540 tax offset.
There are eligibility rules that need to be met. First, the spouse receiving the super contribution cannot have assessable income, total fringe benefits and reportable employer super contributions greater than $37,000 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 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 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 found about 14 per cent of Australians earn 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.
In other words, the spouse tax offset now is available to 8.5 million Australians, against only 2.6 million pre-July 2017.
Sydney Financial Planner Peter Lambert says: “It’s a big free kick and although little known and 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 changes to super that result in less tax benefits for those with over $1.6m in retirement, it makes sense for couples to try and equalise super account balances in 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.
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”.
At its best 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.
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 3 per cent, 18 per cent guaranteed return on a super contribution is not a bad idea.
By James Gerrard
24 November 2017