Can you boost your retirement savings and reduce your tax bill, at the same time?
One easily overlooked financial planning strategy that is accessible from the current 2020 financial year is the superannuation five-year catch-up concessional contributions (“CC’s”) provision.
For clarity, superannuation concessional contributions have a flat tax rate of 15% and individuals can contribute up to a capped amount each financial year (currently $25,000) to maximise the use of this concessional tax rate. Employer SG contributions are classified as concessional contributions.
If you have a total superannuation balance of less than $500,000, you will be able to carry forward any unused concessional cap amounts from the 2018/19 financial year. Individuals will be able to access their unused concessional contributions cap space on a rolling basis for a period of five years. Amounts that have not been used after five years will expire. If you are over 65, there are additional rules around eligibility to consider.
Let’s look at two examples:
1) Madelyn is an operator at a coal mine who took 12 months maternity leave from 1 July 2018 and didn’t make any CCs in 2018/19. Madelyn returned to full-time work in July 2019. Her employer superannuation SG contributions for 2019/20 will be $15,000, which is $10,000 less than the cap amount of $25,000. Madelyn has the cashflow capacity to sacrifice $15,000 p.a. of her salary.
The table below shows how she can carry forward $25,000 in unused CCs from the 2018/19 financial year, and also $10,000 per year thereafter (assume the employer SGC is consistent for this example).
| Financial year | CC cap amount | Carry forward CC cap space at 1 July | Employer SGC | Voluntary CC’s | Carry forward cap space at 30 June |
| 2018/19 | $25,000 | Nil | Nil | Nil | $25,000 |
| 2019/20 | $25,000 | $25,000 | $15,000 | $15,000 | $20,000 |
| 2020/21 | $25,000 | $20,000 | $15,000 | $15,000 | $15,000 |
| 2021/22 | $25,000 | $15,000 | $15,000 | $15,000 | $10,000 |
| 2022/23 | $25,000 | $10,000 | $15,000 | $15,000 | $5,000 (5-year period expired) |
| 2023/24 | $25,000 | Nil | $15,000 | $10,000 | Nil |
It also shows that once the 5-year rolling period expires, the last $5,000 of the unused 2018/19 CC’s are forfeited and Madelyn can only salary sacrifice $10,000 up to her CC cap in the 2023/24 financial year.
2) Josh started his own electrical maintenance business in the 2017/18 financial year and is unable to make any super contributions in 2018/19 or 2019/20, due to the cashflow constraints while building his business.
Josh sells an investment property which he has held for 15 years in 2019/20, where he will realise a $100,000 capital gain. After accounting for the 50% CGT discount available to him, Josh’s taxable income will increase by $50,000 in 2019/20. Using the sale proceeds, Josh decides to contribute $50,000 as a personal deductable contribution to his superannuation before June 30, 2020. This is possible because Josh can bring forward the unused CC’s from 2018/19 ($25,000) and add to the CC cap available for the 2019/20 financial year to make the $50,000 concessional contribution.
This yields a tax saving for Josh equivalent to the difference between his marginal tax rate that the $50,000 capital gain would have been taxed at, and the flat concessional superannuation contribution rate of 15% (e.g. if Josh’s marginal tax rate for the $50,000 of additional income was 37% plus Medicare levy, his tax saving would equate to $12,000).
The five-year catch-up concessional contribution provision provides greater flexibility to make concessional contributions which may be helpful even if you have broken work patterns or can’t afford to contribute to your superannuation in a particular year. If you’d like to find out more, get in touch.
Paul Shepherd | CFP®️ Professional, BEng, DipMgt, Accredited Investment Fiduciary®️ is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.