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Tax benefits for unused ‘carry forward’ concessional superannuation contributions

‘Carry forward’ rules allow eligible taxpayers to claim tax deductions for any unused portion of super concessional contributions caps from prior years. This brings tax deductions into the current financial year, which is more than the normal annual concessional contribution cap.

Tax benefits for unused ‘carry forward’ concessional superannuation contributions
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In place since 1 July 2019, the ‘carry forward’ rules are:

  • A concessional contribution is defined as a pre-tax contribution to your super fund
  • Concessional contributions are taxed at a flat rate of 15 per cent in your super fund.

Concessional contributions can come from several sources, including:

  • Pre-tax salary sacrificed contributions you’ve elected to make through your employer
  • Personal contributions.

The combined total of the contributions from each of these sources counts toward your concessional contribution cap, which is $27,500 for the 2022 financial year – an increase from $25,000. These ‘carry forward’ rules give taxpayers the capacity to look back at each financial year, from 1 July 2018, to calculate the ‘unused’ portion of their concessional contributions cap and carry it forward to ‘catch up’ on contributions. Claiming the unused portion of concessional contributions caps in a later financial year can achieve a better tax outcome for that financial year, and maximise the amount contributed to super.

The unused portion is calculated as the difference between the concessional contributions cap for the relevant financial year, minus the total of all before-tax contributions made in that same financial year.

You can only claim unused super contributions from previous years if your total super balance is less than $500,000 at 30 June in the financial year before the year in which you make your ‘catch up’ contributions.

For example, if your total super balance is $450,000 at 30 June 2021, you can make catch-up contributions for your unused cap in the 2022 financial year. If your total super balance at 30 June 2021 is $550,000, you are not eligible to claim unused super contributions from previous years.

Unused concessional cap amounts can only be carried forward for a maximum of five years. After five years, the unused amounts expire.

What are the benefits of catch up contributions?

Making a catch-up contribution is an easy way to boost your super balance at a time when you have the financial resources to do so, while offering significant tax benefits.

The rules give greater flexibility in making contributions to a range of taxpayers, at a time that suits their personal circumstances. Some examples of this flexibility include:

  • Work patterns and income may fluctuate from year to year. A tax deduction for super contributions may not be required in a low income year but may be the following financial year if income is significantly higher.
  • Restricted cash flow may prevent making super contributions. As cash flow improves, ‘catch up’ contributions can be made.
  • Usual income may mean there is little to no tax advantage in making super contributions, but the sale of a large capital asset, such as shares or rental property, results in a significant capital gain. In this instance, a ‘catch up’ contribution made by harnessing unused caps from previous years would reduce taxable income in the year of sale.

Case study

In the 2019 financial year, Virginia was employed on a full-time basis. The superannuation contributions from her employer and salary sacrificed pre-tax contributions totalled $25,000. In that financial year, Virginia maximised her concessional contributions cap and has no ‘unused cap’ to carry forward.

During the 2020 financial year, Virginia lost her job due to the impacts of Covid-19. Her employer had made $8,000 in super guarantee contributions during that financial year. Virginia was concerned about her short-term employment prospects and chose to make no personal super contributions in that year. At the end of the 2020 financial year, Virginia had an unused cap amount of $17,000 - the annual concessional contributions cap of $25,000, minus the $8,000 employer super guarantee contributions.

Virginia remained unemployed throughout the 2021 financial year and made no personal contributions. Her concessional contributions cap for that year was again $25,000, with the total amount counting towards her unused cap. Virginia’s total unused cap of $42,000 across the 2020 and 2021 financial years carries forward to the 2022 financial year - $17,000 from the 2020 financial year plus $25,000 from the 2021 financial year.

During the 2022 financial year, Virginia finds employment and her employer pays $16,000 in super guarantee contributions to her fund.

Virginia’s total super balance at 30 June 2021 is $468,000. Because this is under $500,000, she is eligible to utilise all the unused cap of $42,000 from the previous two financial years.

In addition, Virginia has a 2022 financial year cap of $11,500 remaining, which is the 2022 cap limit of $27,500, minus the $16,000 employer super guarantee contributions made by her employer.

Virginia can make a total concessional contribution of $53,500 in the 2022 financial year, which provides an immediate tax benefit by reducing her taxable income and allowing her to boost her super balance.

After contributing the $53,500, Virginia has no unused cap to carry forward to the 2023 financial year, but will continue to accumulate cap space in future years if she chooses not to maximise her concessional cap.

It is unlikely she will use her unused cap space again in future years, given her total super balance at 30 June 2022 may exceed the $500,000 threshold once contributions are made during the 2022 financial year.

Shared from BDO

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