Maximising concessional contributions is often overlooked in wealth building years, which can have a significant impact on retirement super balances. Building a strong superannuation balance requires optimising contributions and the benefit of time.
Previously there was a use it or lose it approach to concessional contributions. Since 2019, annual limits are not necessarily lost and there is an opportunity to catch up on missed years to boost superannuation balances and perhaps claim a sizable personal tax deduction.
From the 2019-20 financial year individuals with a superannuation balance under $500,000 have five years to carry forward unused concessional contribution limits from previous financial years. 2022-23 is the fourth financial year this strategy has been available, giving those eligible the opportunity to contribute and claim a tax deduction for up to $130,000.
The catch-up contributions can be in the form of increased employer salary sacrifice contributions or personal tax-deductible contributions.
Who is eligible?
To be eligible to use this strategy an individual’s superannuation balance must be below $500,000 at 30 June of the previous financial year.
The carry forward amount is the difference between the annual concessional contribution limit (shown below over the past four financial years) and the tax-deductible amount contributed to superannuation during that year.
All individuals earning an income should consider making concessional contributions, including those who are self-employed or receive investment income.
The carry forward strategy can be useful for high income earners or in years where income is expected to be higher than normal. For instance, where an asset was sold, business income is higher than usual, or a large dividend or distribution is expected from an investment company or family trust.
This strategy can also allow people to catch up on super contributions after a career break.
Bear in mind that amounts contributed to superannuation are locked away until a condition of release is met, such as retirement or reaching age 65.
Why is it beneficial?
Making extra concessional contributions to superannuation can result in significant personal tax savings. It is also a great way to boost superannuation savings.
In retirement the most tax effective place for investment wealth to be is within superannuation.
Since the introduction of the $1.7m pension limit, it is now more important to make the most of concessional contribution limits from the age of 40.
Take the example of 40-year-old Alex who is self-employed and expects to generate $200,000 in taxable income this financial year. Alex has a superannuation balance of $235,000 at 30 June 2022 and a carry forward limit of $102,500. If Alex uses this carry forward limit over the next five financial years, she could have an additional $195,337 in superannuation by age 60, assuming her super generates an average return of 5% per annum.
The extra carry forward contribution of $20,500 per year would also result in an additional tax saving of $4,920 per year.
Things to remember:
- A superannuation deduction notice must be completed and provided to the super fund to claim a personal tax deduction.
- Additional tax of 15% on the contribution may be payable where the Division 293 income threshold of $250,00 is exceeded.
- Seek tax advice on the best way to optimise the potential tax deduction. It may be beneficial to spread the carry forward limit over several financial years.
- Superannuation contribution rules are very complex. It is a good idea to seek advice.
This article was first published in Personal Wealth Adviser, Issue 3.