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Written by Ivan Fletcher – Senior Financial Adviser
$500,000 can carry forward any unused concessional cap amounts for up to five financial years. This 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 “Critical Dates” yield critical information as to whether this strategy can apply to you.
THE CRITERIA TO QUALIFY
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.
In order to apply this strategy this financial year – your TSB needs to have been under $500,000 as at 30/6/20.
TSB – is the Total aggregate of all super and pension accounts you may have.
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||Second Year of accrual – of unused Concessional Contributions|
|2020/21||Unused Concessional Contributions (18/19 & 19/20) can be carried forward|
and used this financial year
Working Example – Sam has a one off $50,000 Capital Gain
Sam commenced Salary sacrifice this year at a rate of $500 per month ($6,000 for the year).
She has a large capital gain this year of $50,000 after selling some investments which are going to be taxed at the 39% tax bracket and is looking for some additional deductions to offset the capital gains.
As Sam has not use dup her full $25,000 Cap in either of the previous years and same again this year, she will have the capacity to make catch up contributions.
Although her balance is currently $510,000 right now it was only $420,000 as at the start of the financial year (30/6/20) – and thus qualifies to make a catch up contribution.
The simplest way to calculate her maximum contribution amount is to look at the 3 year period as a whole – per the following table.
|20/21||$ 6,000||Salary Sacrifice|
|Total 3 Years||$ 42,000||Total 3 Years|
|Maximum||$ 75,000||3 yr x 25k|
|Catch up||$ 33,000|
The maximum contributions allowable over the 3 year period (Since 1/7/18) is $75,000.
The total contributions received (by 30 /6/21) including both SG and salary sacrifice is $42,000. Therefore Sam could make an additional personal contribution to her super (From her own cash resources) and claim it as a tax deduction in her personal tax return.
Personal Tax Saving : $12,870 ($33,000 x 39% inclusive of medicare levy)
Less Contributions Tax : ($4,950) ($33,000 x 15%)
Net Tax Benefit to Sam : $7,920
THINGS YOU SHOULD KNOW
Criteria – You must first qualify to make a voluntary contribution ?
You may qualify to make a voluntary contribution to super via one of the following conditions a the time of the contribution :
• Under age 67
• Between age 67 and 74 and have satisfied the Work Test (40 hours in 30 days)
• Between age 67 and 74 and qualify for the Work Test Exemption
Work test exemption – Explained
The work Test exemption is relatively new legislated that applied from 1 July 2019.
• You meet the work test in the previous financial year, AND
• Your total superannuation balance (across all your super and/or pension accounts) is less than $300,000 (as of 1 July in the year of contribution) AND
• The work test exemption has not been used in a previous financial year.
Year by Year Proposition – 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.
STRATEGIES – For Reducing Total Superannuation Balance (below $500,000)
For those with a Total Super Balance approaching the $500,000 balance or even slightly over, there are some strategies worth considering to reduce or limit your TSB to assist in qualifying for Criteria 2 (per this article):
- 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.
- For those above preservation age, you can 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 you wish to utilise the catch-up concessional contribution rules.
STRATEGIC CONSIDERATIONS FOR APPLICATION OF THIS STRATEGY
• Inconsistent income years. If you have a low-income year followed by a high-income year due ( eg’s leave without pay, taking LSL on half-pay, or substantial periods of unemployment or in the year of a large Bonus or Trust distribution).
• Abnormally Large taxable income years in the future such as a significant work Bonus, or a Capital Gains Event (from the sale of shares, property or business).
This article is for educational purposes only and cannot be taken as personal advice. It does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each individual’s circumstances. You should consult with a financial adviser to discuss your personal situation.