The previously announced changes to super now take affect from the 2018-19 financial year, whereby individuals can carry forward any unused amounts in relation to the concessional (before-tax) contribution cap of $25,000, for up to five years. However, to be eligible you must have a total superannuation balance below $500,000 (if there are multiple accounts, the balance of all super accounts combined).
The 2018-19 financial year is the first year unused contributions can start to accrue, with the 2019-20 financial year the first year in which the catch up payment can be used.
For example, if only $5,000 was contributed into super (either from an employer or business) in the 2018-19 financial year, in the next 2019-20 financial year a total of $45,000 (the $25,000 cap for FY19-20 + $20,000 unused from the FY18-19) could be made as a tax-deductible contribution.
Or, if no before-tax contributions were made for either the 2018-19 and 2019-20 financial years, in the 2020-21 financial year a total of $75,000 could be contributed to super as a tax deduction ($25,000 for each of the 3 financial years)
As a result, the catch-up contributions can be an attractive strategy to build retirement savings and/or reduce taxable income for individuals in scenarios such as the following:
- Mothers/fathers who have been on parental leave so have not been utilising their deductible superannuation contribution caps.
- Business owners and farmers where taxable incomes are inconsistent and vary greatly from year to year.
- Individuals inheriting taxable income from an estate (which may push you into a higher marginal tax bracket)
- Individuals who have made a large capital gain on property or shares (using the tax deduction to offset the additional income).
- Receiving a pay rise or bonus which may push you into a higher marginal tax bracket
Additionally, where capital gains are anticipated in a particular financial year in the future (i.e. targeting to sell an investment property at a specific time), strategic tax planning could mean holding off on making additional before-tax contributions in order to build up the accrued amount to use in that particular financial year. Spouse contribution splitting (where a portion of one spouse’s contributions are transferred to the other) may also be useful in allowing a particular individual to accrue a catch-up amount where a capital gain is only one individual’s name.
Work with your financial adviser to map out how to achieve this strategy, if you need assistance contact us here.
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