An individual’s unused concessional contributions cap can be carried forward for up to five years, allowing a concessional contribution greater than the general concessional contributions cap.

From 1 July 2019, individuals may be eligible to use their unused concessional contributions for the first time, allowing a tax deduction of up to $50,000 in the 2019/20 financial year, or a similar opportunity with salary sacrifice. Unfortunately, the complexities around the eligibility and timing of contributions means non-advised people could be missing out on a significant opportunity to reduce their tax bill.

What are catch-up concessional contributions?

From 1 July 2018, an individual’s unused concessional contributions cap can be carried forward for up to five years, allowing a concessional contribution greater than the general concessional contributions cap, which is currently $25,000. Unused concessional contributions can be first used in the 2019/20 financial year if the individual’s total superannuation balance at 30 June 2019 is less than $500,000.

At first glance, a total superannuation balance may seem like a simple concept that captures both accumulation and pension interests, however, it can be quite complex because it also captures defined benefit interests and a modified transfer balance account.

Chart 1: Concessional contributions

The Australian Taxation Office refers to catch-up concessional contributions as carry forward concessional contributions.

TIP: An individual’s total super balance is available through their MyGov account. Unused concessional contributions are not provided through MyGov at this time and may require a manual calculation.

What are the benefits?

The benefits of catch-up concessional contributions are initially tax driven. A larger concessional contributions cap will provide an individual with a greater opportunity to reduce their personal assessable income and personal income tax.

For employees, this opportunity may be limited, given that some of their concessional contributions cap will already be used by compulsory employer superannuation contributions, known as the Superannuation Guarantee.

In addition to the initial tax savings, the individual will have more money invested in the concessionally taxed superannuation environment and may result in improved retirement savings.

Table 1 shows the potential benefit of catch-up contributions for employees across various incomes.

Table 1: Catch-up concessional contributions for employees*

		2018/19	2019/20
Employment income	Superannuation Guarantee (9.5%)	Unused concessional contributions cap	Available concessional contributions cap (including unused cap from 2018/19)	Taxation benefit if using available concessional contributions cap
$75,000	$7,125	$17,875	$35,750	$6,726
$100,000	$9,500	$15,500	$31,000	$6,795
$125,000	$11,875	$13,125	$26,250	$7,087
$150,000	$14,250	$10,750	$21,500	$5,160
$200,000	$19,000	$6,000	$12,000	$3,840

*Assumptions:

• Total superannuation balance is less than $500,000 at 30 June 2019.
• No other income.
• Employment income unchanged.
• 5% Superannuation Guarantee is based on pre-salary sacrifice income.

For non-employees who do not receive the Superannuation Guarantee the benefits of catch-up concessional contributions may be greater. This is shown in Table 2.

Table 2: Catch-up concessional contributions for non-employees

	2018/19	2019/20
Non- employment income	Unused concessional contributions cap	Available concessional contributions cap (including unused cap from 2018/19)	Taxation benefit if using available concessional contributions cap
$75,000	$25,000	$50,000	$7,990
$100,000	$25,000	$50,000	$10,750
$125,000	$25,000	$50,000	$12,375
$150,000	$25,000	$50,000	$12,780
$200,000	$25,000	$50,000	$13,600

Moving beyond 2019/20

The opportunity and benefits of catch-up concessional contributions become more substantial as we move beyond the first year of application (2019/20), but so does the complexity, as illustrated in Table 3.

Table 3: Catch-up concessional contributions beyond 2019/20

Applicable financial year	2019/20	2020/21	2021/22	2022/23	2023/24	2024/25
Captures unused concessional contribution cap from:	2018/19	2018/19 2019/20	2018/19 2019/20 2020/21	2018/19 2019/20 2020/21 2021/22	2018/19 2019/20 2020/21 2021/22 2022/23	2019/20 2020/21 2021/22 2022/23 2023/24
Maximum unused available cap accrued*	$25,000	$50,000	$75,000	$100,000	$125,000	$125,000
Maximum concessional cap available*	$50,000	$75,000	$100,000	$125,000	$150,000	$150,000
Total super balance of less than $500,000 at:	30 June 2019	30 June 2020	30 June 2021	30 June 2022	30 June 2023	30 June 2024

* The concessional contributions cap is indexed. The table above ignores any indexation.

Ultimate complexity is achieved in 2024/25 when we are first introduced to the concept of overlapping five-year periods.

In managing catch-up concessional contributions, it is important to understand the order applying to using an individual’s concessional contributions. The current financial year’s concessional contributions cap is used first, before drawing on the individual’s earliest to most recent unused concessional contributions cap within the relevant period.

For example, in the 2020/21 financial year, concessional contributions will first use the 2020/21 financial year’s concessional contributions cap, then draw on any unused concessional contributions cap from 2018/19, then finally drawing on any unused concessional contributions cap in the 2019/20 financial year. Refer to the Diagram 1

Target clients

Catch-up concessional contributions may be particularly useful for:

• the self-employed;
• irregular income earners;
• people who retire early (prior to age 65) realising a capital gain; and
• pre-retirees with a recent focus on saving for retirement.

Self-employed

Often the self-employed (including sole traders, partnerships and those running a business through a company or trust) are solely focused on their business activities and fail to build superannuation retirement savings. It is often suggested that their business is also their retirement strategy. Unfortunately, often a business’s value can be significantly affected by changes in technology or legislation.

Those operating as a sole trader or partnership are not required to make compulsory super contributions and those employed by their own company or trust sometimes structure their income to minimise compulsory employer super contributions.

It is important that the self-employed diversify their retirement strategy and consider increasing their superannuation savings. Given a historical lack of concessional contributions for the self-employed, there may be significant unused concessional contributions cap available, allowing them to catch-up on years of non-contributing. For those running a company or trust, it may also provide an opportunity to tax-effectively distribute equity from that entity.

Irregular income earners

Some individuals, owing to the nature of their business or employment, have irregular income patterns. Catch-up concessional contributions will allow these individuals to make less concessional contributions in less profitable years and make higher concessional contributions in more profitable years. Catch-up concessional contributions enable these individuals to better manage their cashflow and tax position, in a similar way as an eligible primary producer uses farm management deposits.

Example: Boosting contributions when circumstances suit

Brayden is a builder and his income can vary significantly across different financial years. Ironically, while bad weather can be bad for business, extremely bad weather can be good for business. In 2018/19, Brayden had a reasonable year, allowing him to make a modest concessional contribution of $10,000. In 2019/20, wild weather patterns means Brayden has an extremely good year. To reduce his tax liability, Brayden makes a concessional contribution of $30,000 (using his 2019/20 concessional contributions cap in full and $5,000 from his $15,000 of unused concessional contributions from 2018/19). His total super balance at 30 June 2019 was $170,000.

Similarly, catch-up concessional contributions could be useful for those who have periods of absence from the workforce because they are caring for children or the elderly.

People who retire early (prior to age 65) and realise a capital gain

Given the concessional tax treatment of retirement income streams from age 60, many early retirees pay little or no tax on their retirement income. This may all change when the early retiree disposes of a personally held capital gains tax (CGT) asset and realises a significant capital gain. From 1 July 2019, catch-up concessional contributions provide early retirees with a tax-effective way to manage a large capital gain.

Example

Holly-Marie, age 62, retires early. Most of her retirement income is generated from an account-based pension and an investment property. In 2018/19, she had personal taxable income of $25,000 and paid $852 tax. No concessional contributions were made in 2018/19 and her total super balance at 30 June 2019 was $335,000.

In 2019/20, Holly-Marie has decided to sell her investment property and realises a net capital gain of $125,000, which increases her taxable income to $150,000 and tax payable to $45,997. Holly-Marie could reduce her personal tax liability to $25,717 by making a personal tax-deductible super contribution of $50,000 by utilising $25,000 from her 2019/20 concessional contributions cap and $25,000 from her unused 2018/19 concessional contributions cap. After considering her $7,500 ($50,000 x 15%) tax on contributions, Holly-Marie has reduced her overall tax liability by $12,780.

Pre-retirees with a recent focus on saving for retirement

A common financial objective is to first eliminate debt on the family home. Once achieved, the focus often turns towards saving for retirement. At this point, the individual may have built-up unused concessional contributions, which they can now use to accelerate their retirement savings. Whether they use all their unused concessional contributions in a single financial year, will depend on factors including their ongoing income, risk profile, years to retirement and total super balance.

Splitting concessional contributions with a spouse

Contributions splitting allows a super member to split concessional contributions with an eligible spouse. The benefits of contributions splitting include better management of the total super balance, transfer balance cap, early access to super and delaying when super will become assessable for social security.

When a member uses their unused concessional contributions cap, the maximum contribution amount that can be split includes the unused concessional contributions cap utilised in that financial year.

Example

In the financial year 2019/20, Declan makes total concessional contributions to a taxed super fund of $40,000 by utilising $25,000 from his 2019/20 concessional contributions cap and $15,000 from his unused 2018/19 concessional contributions cap. The maximum contribution Declan can split to his spouse is $34,000 ($40,000 x 85%). His total super balance at 30 June 2019 was $420,000.

Personal tax-deductible versus salary sacrifice contributions

Employees have the choice of making additional concessional contributions by either personal tax-deductible contributions or salary sacrifice. Depending on the circumstances, the employee may be advantaged (or disadvantaged) by choosing one form of contribution over the other. Table 4 illustrates the considerations for each form of contribution.

Table 4: Personal tax-deductible versus salary sacrifice contributions

Personal tax-deductible contributions	Salary sacrifice
Available to all individuals who are eligible to make voluntary super contributions.	An employer may or may not offer salary sacrifice. If offered, the arrangement must be in place before the employee has earned the entitlement.
Do not reduce the employer’s compulsory superannuation contributions (Superannuation Guarantee).	An employer may either maintain or reduce (including to nil) existing Superannuation Guarantee (SG) contributions. Example: Tahlia-Rose earns a wage of $100,000, receives SG of $9,500 and had a total superannuation balance at 30 June 2019 of $227,000. In 2019/20, Tahlia-Rose uses her unused concessional contributions to salary sacrifice $31,000. Tahlia-Rose didn’t realise that her employer pays SG on her reduced wage of $69,000. Her SG has reduced to $6,555 ($2,945 less). Had Tahlia-Rose made a personal tax-deductible contribution of $31,000, her SG would have been unchanged at $9,500. The proposed legislation to address this issue is not yet law.
A person has control over the timing of the contribution. The contribution must be received by the super fund in the year that the tax deduction will be claimed.	An employer has control over the timing of the payments. Superannuation legislation does not specify frequency, however, an industrial relations instrument may – for example, the Modern Award. This could lead to significant delays between sacrificing salary and when the contribution is made. In addition, it could cause inadvertent breaches of the concessional contributions cap. Consider whether timing requirements can be included in the salary sacrifice agreement.
A person can choose which fund to contribute to.	An employer may choose which fund the salary sacrifice benefits are contributed to (subject to any limitations under an industrial relations instrument – if any). Some employees can choose which fund their SG must be contributed to, this does not apply to salary sacrificed benefits.
A Notice of Intent to Claim a Tax Deduction form must be provided to the super fund, indicating that a tax deduction for the contribution will be claimed. Complex timing requirements apply to the provision of this notice. If not adhered to, the ability to claim a tax deduction will be lost.	A valid salary sacrifice agreement is in place with respect to entitlements before they are earned. Once implemented, the automated nature of salary sacrifice may be attractive.
Generally, there is no impact on salary continuance benefits.	Consider any potential impact on salary continuance benefits.

Now you are caught up…

Catch-up concessional contributions are now live and offer an unprecedented opportunity for people to manage their taxable income and tax payable. Financial planners must take care not to get caught out. It’s important to identify clients who could potentially benefit and educate them about the benefits of catch-up concessional contributions, the importance of the timing of contributions and the need to lodge a Notice of Intent to Claim a Tax Deduction form, if the person is making personal tax-deductible super contributions.

Non-advised people may miss out on this opportunity due to a lack of awareness, getting the process wrong or could reduce the overall benefit by choosing the wrong method of contribution.

Scott Quinn, Senior Technical Services Manager, IOOF TechConnect.

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QUESTIONS

To answer the questions, click here.

1. Which clients are most likely to be benefit from catch-up concessional contributions?

i) Stuart, consistently a high-income earner;

ii) William, an artist who has good and bad income years;

iii) Janet, running her business as a sole trader; or

iv) Mark (63), retired and has just realised a large capital gain.

a.ii)  and iv) only.

b. ii), iii) and iv) only.

c. i), iii) and iv) only.

d. All of the above.

 

2. According to the article, what action should be taken by financial planners with regards to catch-up concessional contributions?

a. Identify and educate their clients.

b. Always use their available catch-up concessional contributions in 2019/20.

c. Defer using concessional contributions to a higher income year.

d. Utilise catch-up concessional contributions with salary sacrifice.

 

3. What is the order that applies to using an individual’s concessional contributions cap?

a. The individual can choose the order.

b. Use the current year’s concessional contributions cap, then move from the earliest to the most recent unused concessional contributions cap.

c. Use the earliest to most recent unused concessional contributions cap, then use the current year’s cap.

d. Use the current year’s concessional contributions cap, then move from the most recent to the least recent unused concessional contributions cap.

 

4. In the 2021/22 financial year, what is the maximum possible concessional cap available (assuming no indexation)?

a. $75,000.

b. $100,000.

c. $75,000 if the total super balance is less than $500,000 at 30 June 2021.

d. $100,000 if the total super balance is less than $500,000 at 30 June 2021.

 

5. In 2018/19, Troy had total concessional contributions of $12,000. His total super balance at 30 June 2019 was $450,000. What is Troy’s available concessional contributions cap in 2019/20?

a. $50,000.

b. $38,000.

c. $25,000.

d. $37,000.