Clever use of the concessional contributions cap rules can provide significant tax and retirement planning advantages for clients.
2018/19 is the first financial year in which eligible clients can stockpile their concessional contributions cap for use in future years. Clever use of these rules can provide significant tax and retirement planning advantages for clients. Now is the time to become familiar with the rules governing catch-up concessional contributions, how and when to stockpile unused concessional contributions cap amounts, and how to manage a client’s total superannuation balance.
In a nutshell
A client will be eligible to use the catch-up rules to increase their concessional contributions cap in a financial year if:
1. Their total superannuation balance at the end of June 30 of the financial year prior to the year of contribution is less than $500,000; and 2. They have not used their full concessional contributions cap in any or all of the prior eligible financial years, up to a maximum of five financial years immediately before the year of contribution.
Any concessional contributions cap amount unused by an eligible client in a financial year can be used in any of the following five financial years.
Practically, this means that in:
2019/20 – only 2018/19’s unused cap can be used in addition to the current year’s.
2020/21 – only 2018/19 and 2019/20’s unused cap can be used in addition to the current year’s.
2021/22 – only 2018/19, 2019/20 and 2020/21’s unused cap can be used in addition to the current year’s.
2022/23 – only 2018/19, 2019/20, 2020/21 and 2021/22’s unused cap can be used in addition to the current year’s.
2023/24 and thereafter – used cap space from each of the five prior financial years can be used in addition to the current year’s.
Order of catch-up contributions used
When a client uses some of their unused concessional contributions cap from previous years to increase their concessional cap, it is assumed that the unused cap from the earliest of the five previous years is used first.
Example: Liza’s catch-up
Liza is self-employed and makes $15,000 in personal deductible contributions to her superannuation fund every year.
In 2020/21, Liza makes an additional deductible personal contribution of $20,000 on top of her usual $15,000 contribution. At the end of June 30, 2023 Liza had a total superannuation balance of less than $500,000.
Table 1 summarises Liza’s concessional contributions cap position.
Standard concessional cap
Unused cap from previous years
Cap including catch-up contributions
Concessional contributions made
Cumulative unused cap available for future years
Liza’s total concessional contributions in 2020/21 of $30,000 exceed the standard cap by $5,000. Liza can utilise the unused portions of the 2018/19 and 2019/20 caps. As such, $5,000 from her earlier year, 2018/19, is used.
If Liza doesn’t use the remaining $5,000 in unused cap from 2018/19 by the end of the five year period (that is, 2023/24), it will be lost.
Managing a capital gain
As can be seen in Liza’s case, catch-up concessional contributions provide the greatest strategic punch when they are combined with personal deductible contributions. Since July 1, 2017, all clients, whether they are employed, self-employed, retired or unemployed, have been able to claim deductions on personal contributions to super. This has given advisers a much greater strategic tool when it comes to tax planning.
Where a client has a foreseeable spike in taxable income in a future year, part of their concessional contributions caps in preceding years can be saved to help them minimise the tax on that income spike. The most common reason for a spike in income would be the realisation of a capital gain, commonly due to the sale of an investment property, investment portfolio or a similar pool of assets.
Where such a capital gain is anticipated, the key is to ensure the client gets the greatest benefit from each year’s concessional contributions cap. For employees, using part of their cap each year will be unavoidable as their employer pays them Superannuation Guarantee (SG) or other compulsory employer contributions. The remainder of their cap is best used in the year in which their income will be in the highest tax bracket.
Example: Bert’s inheritance
Bert (age 45) earns $90,000 per annum as an employee of CWC Enterprises. In 2018/19, Bert has inherited a portfolio of shares from his late father. The shares have an unrealised capital gain of $100,000 (net of the 50 per cent discount for holding the assets at least 12 months).
Bert’s father’s portfolio consists entirely of shares in four blue chip companies. Bert’s adviser, Jim, has determined that the share portfolio is inappropriate for Bert’s relatively conservative risk profile. The lack of diversification also concerns Jim, and Bert would rather pay off his mortgage than have an investment portfolio.
The only super contributions that have been made on Bert’s behalf are his employer’s SG contributions of $8,550 per annum. Bert’s total super balance is $150,000.
If Bert sells the portfolio in 2019/20 and realises the current amount of unrealised capital gain, he will pay tax on that gain of 39 per cent (including Medicare levy) – a total tax bill of $39,000.
In 2019/20, Bert can utilise his unused concessional contributions cap from 2018/19 of $16,450 ($25,000 minus his SG of $8,550). Combined with the same amount of non-SG concessional contributions cap from 2019/20, this will come to a total available cap of $32,900. By making this amount as a personal deductible contribution (from the proceeds of the portfolio’s sale), Bert will pay contributions tax on this amount at 15 per cent (or $4,935), rather than his personal tax rate of 39 per cent (or $12,831). Bert’s use of the catch-up concessional contributions will save him $7,896 in tax.
If Bert delayed the sale until 2020/21, he could potentially gain even further tax savings by using more catch-up concessional contributions. It is worth considering, however, that delaying the sale of the portfolio would inappropriately expose Bert to higher risk for longer.
Not just for planned income spikes
This strategy is not just for planned spikes in clients’ incomes. From 2019/20 onwards, when a client has an abnormally high tax bill for a year, examining their previous years’ concessional contributions will be a key element in formulating recommendations to help them manage the tax bill.
The importance of the client’s total superannuation balance
Such an approach is, of course, only relevant for those who have superannuation savings below $500,000 immediately before the year in which the catch-up contributions are to be used. This savings threshold will often be no impediment for clients who are building wealth, however, it may become a factor for those approaching retirement or who have retired. When this is the case, clever management of their total superannuation balance may be necessary.
What is total superannuation balance?
Total superannuation balance generally includes the balances or surrender values of all the client’s accumulation accounts, income streams and unallocated rollovers.
There are some very specific rules around total superannuation balance. These include that:
defined benefit income streams are generally given a value that reflects the credits and debits that have been applied to the client’s transfer balance account. There are set formulas that apply to many types of defined benefit income streams.
Structured settlement contributions, usually related to some sort of compensation payments or personal injury settlements, do not count towards a client’s total superannuation balance.
The ATO provides detailed information on the calculation of a client’s total superannuation balance, particularly through its Law Companion Ruling 2016/2.
The crucial date when considering whether a client’s total superannuation balance will allow them to make catch-up concessional contributions in a financial year is June 30 of the prior financial year. If their account balance at the end of June 30 was below $500,000, they will be eligible to make catch-up contributions.
It is important to understand that each financial year is viewed separately. A client could have a total superannuation balance over $500,000 on June 30 before one financial year, and have it drop below $500,000 on June 30 before a subsequent year to see them eligible to make catch-up contributions in that subsequent year.
Example: Dorothy’s fluctuating fortunes
Dorothy (age 45) has unused concessional contributions cap space in 2018/19 of $10,000.
Dorothy makes a significant capital gain in 2019/20 and would like to make as large a personal deductible contribution, so she can reduce her tax bill. She considers using her $10,000 of unused concessional contributions cap space from 2018/19 to increase her concessional contributions cap from $25,000* to $35,000.
Dorothy’s total superannuation balance at the end of June 30, 2019 was $510,000. Unfortunately, this means she is unable to increase her concessional contributions cap using catch-up contributions, as her total superannuation balance is above the $500,000 threshold. As such, she uses the full conventional cap of $25,000 in 2019/20.
In 2020/21, Dorothy receives a large bonus and is again looking to make as big a personal deductible contribution as she can. Her total superannuation balance at the end of June 30, 2020 has dropped to $497,000, due to poor investment performance. This is below the $500,000 threshold.
Consequently, Dorothy can add her unused cap space of $10,000 from 2018/19 to her 2020/21 concessional contributions cap using the catch-up contributions provisions. This will allow her to make $35,000* in concessional contributions in 2020/21 without breaching her cap.
* Assumes indexation is yet to increase cap.
How to manage the client’s total superannuation balance
There are a range of ways in which a client’s total superannuation balance can be managed. Clients who have met a condition of release may be able to withdraw some funds from super. Other clients may be eligible to make spouse contributions to reduce their balance.
Some clients may simply need to delay making contributions in order to ensure their total superannuation balance is below $500,000 on June 30 of the year before that in which they plan to use catch-up concessional contributions.
Example: Brooke’s precise timings
Brooke (age 58) is approaching retirement. In 2018/19, she and her partner, Caitlyn, are downsizing their home, resulting in a likely release of equity of $500,000.
Brooke plans to retire in May 2020, at which time she will have a large amount of unused annual and long service leave paid out as a lump sum. Under her employment contract, she is unable to extend her employment beyond this date.
Brooke would like to contribute $300,000 of the proceeds from the sale of her previous home to super as a non-concessional contribution. Doing so will take her super balance to over $600,000. If she makes this contribution in 2018/19, it will mean she is not able to use catch-up concessional contributions in 2019/20, as her total superannuation balance will be above $500,000 on June 30, 2019.
If Brooke makes the $300,000 in non-concessional contribution after June 30, 2019, she will still be able to use catch-up concessional contributions in 2019/20, as her total superannuation balance would be below $500,000 on the test date of June 30, 2019. The ability to use catch-up concessional contributions to make a larger personal deductible contribution in 2019/20 can help her mange her larger income tax bill, caused by the lump sum leave payments, in that year.
How much benefit Brooke can gain from using catch-up concessional contributions will depend on a number of factors, including her unused cap amount in 2018/19 and 2019/20 and her taxable income.
Since July 1, 2017, advisers have had a range of new strategies to grapple with when considering how best to achieve clients’ goals. Some of these strategies have been related to managing new restrictions. By contrast, the catch-up concessional contribution rules open up opportunities for advisers to more effectively help clients manage their tax obligations, as well as build savings as they approach retirement.
What is the total superannuation balance threshold for making catch-up concessional contributions?
Bill (age 50) has only ever had superannuation guarantee contributions made to super on his behalf. These have totaled $10,000 per annum for the 10 financial years up to 2020/21 and his total superannuation balance is $250,000 on June 30, 2020. What will Bill’s total available concessional contributions cap, including catch-up amounts, be in 2020/21? Assume the concessional contributions cap is $25,000 in 2019/20 and 2020/21.
$55,000 ($25,000 in 2020/21 and $15,000 from each of 2018/19 and 2019/20).
$100,000 ($25,000 in 2020/21 and $15,000 from each year from 2015/16 to 2019/20).
$110,000 ($25,000 in 2020/21, $15,000 from each year from 2017/18 to 2019/20 and $20,000 from each of 2015/16 and 2016/17).
Which of the following amounts are included in a client’s total superannuation balance? (Multiple options can be selected.)
Any accumulation account balance.
The balance of a client’s account-based pension.
The value of any structured settlement contributions.
Any amount previously withdrawn from super.
Bronson (age 62) has a total superannuation balance of $510,000 at the end of the 2019/20 financial year. He commences a transition to retirement pension and makes a pension payment of $40,000 on August 1, 2020. After the pension payment, some investment returns and contributions, Bronson’s total superannuation balance is $475,000. Can Bronson use the catch-up contribution rules on August 15, 2020 to utilise unused concessional contributions cap from 2018/19?
Which of the following are ways in which clients may be able to manage their total superannuation balance?
Making withdrawals if a condition of release has been met.
Making spouse contributions if eligible.
Delaying large contributions until after the relevant test date.