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Catch-up Concessional Super Contributions

Catch-up Concessional Super Contributions

Often, when we reach the age of 50 or 60 we start to worry about our retirement.

Do I have enough for my retirement?

Is it too late to save sufficient balance to have safe retirement?

And you might have a reason to worry, because superannuation in Australia, which is our best form of retirement savings, is filled with rules, regulations, and super contribution limit.

However, I might have some great news for you, and today I would like to explain a little-known contribution opportunity that might help you to:

  • catch up on those lost years of not contributing enough,
  • grow your super and ultimately retire better,
  • get tax benefits in the form of tax-deduction for your contributions,

This little-known contribution is: – carry forward super contributions, otherwise known as Superannuation Catch-up Concessional Contributions

But first, let’s review very quickly what concessional superannuation contributions actually are.

Those are your deductible contributions, so contributions for which someone claims tax deductions which includes:

  • Superannuation Guarantee Contributions (SGC) which are your employer’s contributions, and that’s your employer who is eligible for tax deduction.
  • Your salary sacrifice contributions,
  • if you are self-employed and you want to claim tax deduction for your personal contributions
  • or even you are a private person, you can still claim tax deduction for your personal contributions,

But we all need to play by the rules.

The annual limit on this type of contribution is $25,000per annum.

I am assuming that you checked if you are actually eligible to contribute to super in the first place. If unsure – view this article. If you prefer, watch my video instead.

If you need to get familiar with superannuation contributions rules, including SG contributions – here is another article for you or alternatively watch that video.

If you would like to understand the benefits of Salary Sacrifice – here is another video for you.

What are carry-forward contributions?

Carry-forward contributions (so-called catch-up contributions) or as the proper industry naming is: Carry-Forward Unused Concessional Contributions, are not any special type of super contribution, but often overlooked contribution opportunity, allowing you to contribute to your superannuation fund the amount of concessional contribution that you have not used in previous years, up to each year contribution limit, and up to 5 years.

After five years, any unused amounts expire.

But it all starts in the financial year 2018/19. This means the first year you were able to make additional concessional contributions by applying your unused concessional contribution cap amounts is the 2019/20 financial year.

If for example, in 2018/19 financial year, only $10,000 was contribution to your super fund as a concessional contribution, and we know that the limit is $25,000, you have $15,000 remaining from that year as unused concessional contribution that you could carry forward and use it to increase your concessional cap until the 2023/24 financial year.

Who can benefit from carry-forward contributions?

Virtually anyone can benefit from carry-forward contributions, but it is especially beneficial for:

  • self-employed, where your income can vary from year to year,
  • any person whose income varies due to commissions, bonuses, or part-time employment.
  • at later stage in your life, when kids are off your hands, your mortgage is paid off and you have more disposable income.

What are the eligibility rules?

  • You have to be eligible to contribute to super in the first place,
  • Annual limit is $25,000 per financial year,
  • your Total Super Balance (TSB) must be under $500,000 at 30 June in the previous financial year.

So if you are thinking to make a carry-forward concessional contribution in 2020/21, your TSB must have been under $500,000 on 30 June 2020.

And don’t forget that your TSB is the combined superannuation balance of all your super funds at 30th June in:

  • accumulation phase
  • retirement phase
  • any rollovers in transit between super funds.

If your TSB falls below $500,000 at a later date (for example due to market fall), you are once again eligible to apply any of your unused concessional contributions cap in a future financial year.

The $500,000 TSB is not subject to indexation. It is design for people who had no time or sufficient funds to grow their super funds to reasonable limits.

Case study 1

Patricia – took time off work in 2019/20 to complete her study. Her super fund’s balance on 30/06/20 was $150,000.

Following year 2020/21 year when she returned to work, she was able to contribute $50,000 to super as concessional contribution (before-tax) and claim the full tax deduction for this amount.

So that’s $25,000 for 2020/21 and carried forward unused concessional contribution of $25,000 for 2019/20

Case study 2

Tom who is 50 years of age earning an annual salary of $120,000 and super balance of $180,000. That’s his very first year on high salary and he is aware of his poor superannuation balance.

We checked with his super fund all annual concessional contributions:

  • in 2018/19 – $5,000 ($25,000 – $5,000 = $20,000 unused)
  • in 2019/20 – 10,000 ($25,000 – $10,000 = $15,000 unused)

So in 2020/21 he could contribute up to $60,000 as concessional contribution

$25,000 for 2022/21 + $20,000 for 2018/19 + $15,000 for 2019/20 = $60,000

The entire $60,000 in concessional contributions will be taxed at 15% in Tom’s superannuation fund.

Case study 3

Here is Ruby, who plans to use some of her unused concessional contributions cap amounts to make a concessional contribution on top of her employer’s SG contribution of $5,000 per annum

On 30 June 2021 Ruby’s Total Super Balance is $200,000.

Ruby’s unused concessional contribution cap amounts from the previous three financial years are as follows:

  • 2018/19 – $25,000 – $5,000 = $20,000
  • 2019/20 – $25,000 – $5,000 = $20,000
  • 2020/21 – $25,000 – $5,000 = $20,000
  • 2021/22 – $25,000 (allowable limit, out of which $5,000 will be employer contribution)

So the total amount Ruby could contribute as concessional in 2021/22 is $80,000 (after excluding employer contribution of $5,000)

Ruby decides to contribute $50,000. She is eligible to claim tax deduction for the full contribution amount, and her super contribution will be taxed at 15% on entry to superannuation fund.

As Ruby hasn’t used up the full amount of unused concessional contributions, there will be $30,000 still left over as unused concessional for following years.

As the “catch-up contributions work from the earliest year to the most recent year, by contributing $50,000 Ruby is left with unused concessional contribution of $10,000 for 2020/21 and further $20,000 for 2021/22

4 steps to calculating your carry-forward amount.

1. Contact your super fund (or funds if you have several super accounts) for a current valuation of all your super accounts to work out your Total Superannuation Balance (TSB).
2. Ensure your TSB is under $500,000.
3. Check your concessional contributions for previous years and compare this with the contribution cap applying that year.
4. Work out the amount you have available to carry forward from your unused concessional cap. (Some super funds list this information on your annual contribution statement.)

Final observations

As with anything related to superannuation, the rules are complex rules and conditions always apply because of the concessionally-taxed environment proffered by Australia’s superannuation laws.

But there is a great deal of benefit to use your unused concessional contributions for the fullest:

  • the ability to utilise otherwise unapplied unused CC caps.
  • the ability to increase amounts held in superannuation.
  • the potential to increase tax deductions for personal contributions, beyond the standard $25,000 cap; and
  • the potential to move deductions for personal contributions to a later financial year which may suit the timing of an expected higher taxable income as the level of deduction depends on the level of your Assessable Income, Taxable Income, and your Marginal Tax Rate

This is a fantastic tax strategy in a year when you dispose of some major asset, such as investment property or big bunch of shares. The extra unused concessional contributions can work wonders for reducing your personal tax liability and your Taxable capital gain when preparing your Income Tax Return.

Please make sure that you triple-check your personal contribution limit for the year and you understand Super Contribution Caps and not contribute above the limit to your superannuation fund as you will find yourself in a debacle of excess contributions for which you will be fined a penalty.

If you would like to learn more about investing, enjoy this special eBook addition: 12 Investment Principles.

If you find superannuation and planning for retirement a bit confusing, feel free to reach out as I can help you prepare for the best retirement you could have.

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