With the start of the new financial year, the changed rules for before-tax (tax deductible/concessional) contributions now come into effect. This allows individuals who have their total superannuation balance under $500,000 (i.e. if you have more than one account the combined balances cannot be above $500,000) to catch up unused before-tax contributions.
This means if you did not use the full amount of your concessional contribution cap (currently $25,000) in the 2018-19 financial year, you can carry-forward the unused amount and take advantage of it up to five years later.
For example, an employee earning $100,000 would have employer contributions of $9,500 (based on the 9.5% super guarantee), and in the 2018-19 financial year they only had available a further $5,000 to add as a before tax contribution. As a result, $10,500 ($25,000 cap – $9,500 – $5,000) of the cap was unused. In the 2019-20 financial year this $10,500 amount can be added to the before tax cap, with a total of $35,500 ($25,000 + 10,500) available to be added to super.
As a result, this provides opportunity to catch up on contributions for individuals unable to use the full cap amount each year, or with some forward planning it can also be used for effective tax planning for capital gains, as per the case studies below:
Case Study 1 – Business Owner with lumpy income
Bob, a business owner has been unable to make super contributions for himself in the first two years of his new business, particularly as his business income is very lumpy. With no contributions made in the 2018-19 and 2019-20 financial years, Bob has the ability to carry forward the 2 x $25,000 amounts of super contributions into the 2020-21 financial year. By the third year (2020-21 financial year) Bob’s business is doing very well and he also receives a large number of income payments; as he is able to carry forward the super contribution payments, Bob decides to make a before-tax super contribution of $60,000. (This payment could be broken down to using the 2x 25,000 payments ($50,000) plus a further $10,000). Bob is also able to claim a tax deduction for the $60,000, reducing his taxable income in a higher income year.
Additionally, as Bob did not also use all of the $25,000 cap for the 2020-21 financial year, $15,000 ($25,000 cap less the $10,000 contribution) can be carried over to the next financial year should he have another high-income year.
Case Study 2 – Capital Gains Tax savings on property sale with forward planning
Cassie has an investment property with capital gains and she is considering selling it in a number of years.
Cassie earns about $52,000 per annum and has employee contributions of $5,000 each year. Therefore, starting in the 2018-19 financial year, each year $20,000 ($25,000 cap less the $5,000 employer contributions) in unused contributions can be carried forward for up to 5 years. In the fifth year (2022-23) Cassie has 4 years of $20,000 carried forward amounts totalling $80,000, plus the 2022-23 financial year cap of $25,000. Therefore, in the 2023 financial year Cassie can make up to $105,000 in before tax contributions.
In selling the property Cassie realises capital gains of $100,000 (after CGT discounts). Cassie can contribute $100,000 of the property sale proceeds to super as a before tax contribution, reducing her taxable income by $100,000 and her capital gain to zero. Based on Cassie’s marginal tax rates this will have saved her $35,290 in tax in personal name, however tax paid within super at 15% would reduce the saving by $15,000, for a net tax saving of $20,290.
(The leftover $5,000 will also be used up by her employer contributions of $5,000, and Cassie will have no carry forward contributions remaining).
If Cassie had sold the property earlier or made additional contributions in previous years, she may not have been able use the carry forward provision to maximum potential.
Your Altitude Financial Adviser can assist you with contribution planning to utilise the carry forward provision.
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