Topping-up your super can become a tax-effective way to provide you with an income in retirement.
That’s why so many Australians choose to top up their before-tax contributions (concessional contributions) through salary sacrificing or making a tax-deductible personal contribution to their super.
The concessional contributions are currently capped at $27,500 per year, which was increased from $25,000 on 1 July 2021. Concessional contributions can include Super Guarantee contributions from your employer, salary sacrificed amounts and tax-deductible personal contributions.
But thanks to the catch-up rules, you can now make extra before-tax contributions above this cap through a process known as ‘carrying forward’. It’s a great improvement to how our super system works because it gives you the flexibility to structure your contributions in a way that makes sense for you.
How do the catch-up rules work?
You can carry forward any unused portion of your concessional cap from 1 July 2018 for up to five financial years if you’re eligible.
You can then make a contribution using the carry forward amounts as long as your total super balance at the end of the previous financial year is below $500,000.
Let’s look at an example where you have $400,000 in super on 30th June 2021.
Say you received $10,000 of employer contributions in each of the past 3 financial years and made no other concessional contributions. This was $15,000 less than you were allowed to contribute in each financial year from 1 July 2018 to 30 June 2021, when the basic concessional contributions cap was $25,000.
At 30 June 2021 your total super balance is $400,000. This means you and your employer can contribute up to $72,500 in concessional contributions in 2021-22 without exceeding your concessional contributions cap (so no extra tax would apply).
$45,000 accrued carry-forward + $27,500 basic concessional contributions cap = $72,500
Note that you must still meet the normal eligibility rules to contribute to super.
Catch up rules over time
As time goes on, if you don't use your accrued carry-forward amounts, they will expire.
Let's look at the previous example again.
At 1 July 2021 you had accrued $45,000 of carry-forward contributions. Let's say you made concessional contributions that just used up your basic concessional contributions cap in the next three financial years.
This means you haven't used any of your $45,000 accrued carry-forward, since you have to exceed the basic cap to start using up your accrued carry-forward. However, from 1 July 2024 you would have accrued carry-forward of only $30,000 left to use because the $15,000 that accrued in 2018-19 would no longer be available, as it had not been used within five financial years.
How to make the most of the new rules
If building up your super is a priority for you, it may be wise to take advantage of these new carry-forward rules. Here are some of the strategies you could consider:
- Making up missed contributions. If you’ve spent time out of the workforce and haven’t been contributing to super, you could use this opportunity to catch up on the contributions you missed out on.
- Salary sacrificing. This is where you arrange for your employer to pay some of your pre-tax salary into your super fund, above the 10% Super Guarantee contributions they’re contributing on your behalf.
- Personal deductible contributions. You can claim a deduction for your personal super contributions whether you are an employee or self-employed.
- Windfalls. If you receive a lump sum of money, such as a bonus or inheritance, you could add this to your super as a personal deductible contribution.
Super rules can be complicated, and it’s important to make sure you’re adding up your contribution amounts correctly. So before making extra contributions to your super, we encourage you to talk to contact us. We can help you make sure you don’t exceed your contributions cap and end up paying penalties for doing so.
A note on taxation considerations
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Malhi Private Wealth is registered as a Tax (Financial) Adviser under the Tax Agent Services Act 2009 number 26063596 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.
Example assumes a salary increase of 3% per year, and that the concessional super cap remains at $25,000 for 2019–2020 and 2020–21 before increasing to $27,500 in 2021–22.