Catch up Super Contributions
New super rules passed in last year’s budget called “catch-up” concessional contributions come into effect from 1 July 2018.
These changes will allow people to get more into Superannuation and boost their nest egg. They can also provide significant tax and retirement planning advantages.
How do Catch-Up Concessional Contributions work?
- Normally the concessional or “before tax” contribution cap or limit for superannuation is $25,000 per annum. This is the amount of money a person can contribute to super “before tax” and it includes the 9.5% Super Guarantee that all employers must pay and any salary sacrifice or personal contributions you make to super.
- “Catch Up” Concessional Contributions will allow people to carry forward any unused balance of the $25,000 limit for up to five years.
- The next financial year in 2019-20 is the first year you can access your unused concessional contribution limit from 2018-19.
- This concession is not available if your total superannuation balance at the end of June 30 of the financial year prior to the year of contribution is above$500,000.
- If you are aged 65-74 you still need to meet the work test.
- Assume you have contributed $15,000 to super this financial year. You have $10,000 of the $25,000 cap you have not used. Next Financial Year you could contribute up to $35,000 to super and claim a tax deduction. This is the usual $25,000 cap plus the $10,000 you didn’t use last year.
Who would benefit from using catch up contributions?
- The new rules were designed to give people with irregular income or work patterns the same opportunity for a comfortable retirement as those who have a regular income all their working life.
- In particular Women often have interrupted work patterns or work part-time, which contributes to lower average superannuation account balances than men because they take time off to look after kids.
- Anyone who is self-employed and has good and bad years because their business is cyclical. For example if you expect an abnormally high tax bill for a year, examining your previous years’ concessional contributions could provide an opportunity to reduce your tax bill significantly by making a large before tax contribution to super that isn’t just limited to the usual $25,000 cap. Alternatively, if FY19 is heading toward a poor result but you expect improvement in future, you could hold off making a contribution to make a larger contribution when conditions improve in FY20 and you’ll get a larger benefit from the tax deduction.
What about reducing Capital Gains Tax?
- A common reason for a spike in income would be a big capital gains tax bill, most likely due to the sale of an investment property. You could use any unused portions of your cap to reduce your taxable income and keep more of your money!
- In this case if your super balance is below $500,000 it could make sense to hold off selling an investment with large Capital Gains Tax consequences until you accrue a large amount of un-used concessional contributions that allow you to make a bigger contribution in the year you sell the asset to reduce tax.
- But, BE CAREFUL! The government could change the rules on you faster than you might be able to sell and take advantage.
You need to manage your Total Super Balance
- Often it is easier to set a standard monthly contribution into super, saving the money before you have an opportunity to spend it elsewhere and then you don’t need to find a lump sum at year end.
- The ability to catch up on contributions also means you need to keep an eye on your total super balance. If it goes above $500,000 at the end of the financial year, you will LOSE the un-used part of your cap.
- EACH financial year is actually viewed separately. If your balance is over $500,000 one year, but falls below $500,000 the next year, you can use the catch up contributions.
- If you are over the cap, but have access to super, you could withdraw money and perhaps have a spouse put it into her super to get you under the cap.
- You could split contributions with a spouse who has a lower super balance to ensure you stay below the cap.
Catch-up Concessional contributions provide the opportunity to save tax and boost your retirement nest egg. The key is the timing of these contributions to make the most of the new rules. Seek advice to get the best outcome.
A financial planner from Knight Financial Advisers can help you explore your options for contributions, investments and more.Contact us to book an appointment.