In our last article in May, we emphasized the need to get your super contributions in order before June 30. We discussed the ‘carry forward’ rules for non-concessional contributions. The feedback was excellent, so this week we want to talk about the ‘catch-up’ rules for concessional contributions.
Just to remind you, concessional contributions are contributions for which you claim a tax deduction. They are capped at $27,500 per person per year. Non-concessional contributions are contributions that are paid using after-tax money. Their cap is $110,000 per person per year.
The benefit of a concessional contribution is that you can claim a tax deduction for it. It will be taxed at 15% in the hands of your super fund, but if your personal income tax rate is higher than 15%, you will pay less tax overall.
The above annual limits are not hard and fast. In terms of concessional contributions, in 2021/2022 they can be averaged out over a four-year period using what are known as ‘catch-up rules.’ These rules can help you if you haven’t used your entire pre-tax (concessional) contribution cap in any year or years since 2018-19.
Basically, if you contributed less than the cap in any previous year from 2018/2019 onwards, you can contribute the difference in the current year, as long as the total contributed does not exceed the maximum allowed for the total four year period. (As the rules did not take effect until 2018/2019, at the moment you can only go back four years (the current financial year plus the three before it). But the rules actually refer to five years, so for the 2022/2023 year, the rules will cover that year and the four before it).
For the three financial years 2018/2019, 2019/2020 and 2020/2021, the annual cap was $25,000. In the current financial year, the cap has grown to $27,500. So, between 2018/2019 and the current year, a person has been eligible to make a total of $102,500 in concessional contributions. That means that you can contribute any amount this year that brings your four-year total up to be less than or equal to $102,500.
An example usually helps to understand this type of thing. Let’s say you are an employee and your employer has contributed $10,000 into super as a concessional contribution in each of the last three years. You have not made any additional contributions yourself. There have therefore been three years when you could have contributed an extra $15,000 but you did not. This makes a total of $45,000 that could have been contributed.
This year’s cap is $27,500. So, in this year, you can contribute up to $72,500 into super as a concessional contribution ($45,000 plus $27,500). This could be really useful if you have come into money in the current year, from the sale of an asset or an inheritance or something like that.
To extend the example, let’s say you did inherit $60,000 this year and your salary is $100,000. Your employer will again make an employer contribution of $10,000. You can then contribute the entire $60,000 inheritance into super – and claim a tax deduction for it. This would drop your personal tax bill by about $18,825. Within the super fund, the $60,000 would be subject to tax of 15%, or $9,000. So, you save around $9,825 in total tax.
Looked at another way, you will have an extra $18,825 in your hand now (through your tax return) and $51,000 in super. Your $60,000 has become $69,825.
Of course, $51,000 is now locked in your super fund. But it can then be invested there and the earnings will also be subject to lower rates of tax than if you invested the money yourself. If your super needs a boost, this can be a great way to get it.
(If you wanted to accelerate the process further, you could then use the additional $18,825 cash that you get in your tax return to finance an extra $17,500 in super contributions next financial year (which adds up to the limit of $27,500 if we include $10,000 from your employer). This would get you a further tax return of $5,690. Your super fund would pay tax of $2,625, so you would save a total of just over $3,000 more in tax. You would then have an additional $65,875 in your super fund and $5,690 in your hand. This means you have turned your $60,000 inheritance into total assets of $71,565).
So, you can see that the catch-up contributions can be really handy if you need to boost your super.
There is one important pre-condition: you can only use the catch-up provisions if your total super was worth less than $500,000 on the 30 June 2021. If your super balance is below this, then boosting it can make really good sense, especially as you approach retirement.
So, if you think you can afford to make extra contributions and you have some catching up available, please get in touch with us ASAP so we can help you get things sorted well before June 30.