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Under New legislation – Clients with a total superannuation balance below $500,000 can carry forward any unused concessional cap amounts for up to five financial years.
This reform allows those who do not use all of their concessional cap (currently $25,000) in a given year, to carry forward their unused concessional cap amounts to offset taxable income or capital gains in future years.
As always the Devil is in the detail and the “The Criteria to qualify” and “Commencement Date” yield critical information as to whether this strategy is for you.
Only unused concessional contributions cap amounts for the 2018-19 and future financial years can be carried forward. This means the first year an individual will be able to make additional concessional contributions by applying their unused concessional contributions cap amounts is the 2019-20 financial year.
2018/19 First Year of accrual – of unused Concessional Contributions
2019/20 First Year of Use of carried forward unused Concessional Contributions
Unused concessional contributions for this year 2017/18 cannot be carried forward.
SO WHY DRAW ATTENTION TO IT NOW ?
Although the new catch-up concessional contributions rules do not come into effect until 1 July 2018, what client’s do now could impact their ability to use these rules in the future. OF particular relevance is the criteria listed below to have a Total Super Balance under $500,000 a the time of application of the strategy.
THE CRITERIA TO QUALIFY
Criteria 1 – Can You Contribute At All ?
As always with contributions the first criteria is do you qualify to make a contribution to super at all by falling into one of the following categories
· Under age 65
· Between age 65 and 74 and pass the Work Test (40 hours in 30 days).
Criteria 2 – Total Superannuation Balance (TSB) Less Than $500,000
To be eligible to make catch-up concessional contributions in a year you must have a ‘total super balance’ of less than $500,000 as at 30 June at the end of the financial year immediately preceding the financial year in which the contribution is to be made.
Year by Year – It is important to note that it’s only a member’s TSB immediately before the start of the relevant financial year that is relevant. This means an individual who may be ineligible one year due to their TSB exceeding $500,000, may requalify in a future year if their TSB subsequently falls below $500,000. This could occur as a result of negative market movements or benefit payments where a member has satisfied a condition of release.
REDUCING TOTAL SUPERANNUATION BALANCE
This criteria is not a concern for individuals with low superannuation balances as their TSB will not exceed $500,000, nor is it a problem for those individuals with high superannuation balances (example over $1,000,000) as they simply would not be able to use the catch-up provisions anyway as their TSB would preclude them.
For those that are approaching the $500,000 balance or even slightly over, there are some strategies worth considering to reduce or limit your TSB to assist in meeting this criteria:
- Spouse contribution splitting – this may need to be implemented over a number of years as splitting is limited to 85% of concessional contributions made in the previous financial year.
- Commence a transition to retirement pension and take pension payments up to 10% of balance (subject to tax for clients under age 60) to reduce TSB.
- Lump sum withdrawals from superannuation/Pension if you meet a condition of release.
- Delaying contributing to superannuation to ensure their TSB is below $500,000 in the year they wish to utilise the catch-up concessional contribution rules.
CALCULATING – UNUSED CONCESSIONAL CONTRIBUTIONS
The amount of unused concessional contributions cap is the difference between the individual’s concessional contributions in a year and the concessional contributions cap for that year. That amount can then be carried forward for up to five financial years. For example, if a member had an unused concessional cap amount in 2018-19 of $5,000, they could carry that forward and use it to increase their concessional cap in the 2023-24 financial year or any year in-between.
Where a member has unused concessional cap amounts from a number of years, they are required to apply any unused cap in the order of earliest year to the most recent year. In addition, where a member only uses part of the unused concessional cap from a year, the remaining or unapplied balance continues to be carried forward.
At the Extreme – Taking into account the annual $25,000 concessional cap, this means a person with a TSB of less than $500,000 could theoretically make concessional contributions of up to $150,000 in a year without exceeding the cap where no concessional contributions were made in the previous five years and assuming no increase in the concessional cap, ie $25,000 x 5 + $25,000.