Under the new rules, individuals eligible to contribute who have a total superannuation balance of less than $500,000 just before the start of a financial year, can increase their concessional contributions cap in the year by applying unused concessional contributions caps amounts from one or more of the previous five financial years.
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.
TOTAL SUPERANNUATION BALANCE
To be able to make a contribution under the catch-up of unused concessional contributions rules, the value of an individual’s Total Superannuation Balance (TSB) immediately before the start of the relevant financial year (i.e. the 30 June value) must be less than $500,000. While the basic concessional contributions cap is indexed by average weekly ordinary time earnings (AWOTE) in increments of $2,500, the $500,000 TSB threshold is not indexed.
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.
AMOUNT OF UNUSED CONCESSIONAL CONTRIBUTIONS
The amount of unused concessional contributions cap is the difference between the individual’s concessional contributions in a year and the concessional contributions cap for that year. That amount can then be carried forward for up to five financial years. For example, if a member had an unused concessional cap amount in 2018-19 of $5,000, they could carry that forward and use it to increase their concessional cap in the 2023-24 financial year.
Where a member has unused concessional cap amounts from a number of years, they are required to apply any unused cap in the order of earliest year to the most recent year. In addition, where a member only uses part of the unused concessional cap from a year, the remaining or unapplied balance continues to be carried forward.
Taking into account the annual $25,000 concessional cap, this means a person with a TSB of less than $500,000 could theoretically make concessional contributions of up to $150,000 in a year without exceeding the cap where no concessional contributions were made in the previous five years and assuming no increase in the concessional cap, i.e. $25,000 x 5 + $25,000.
Shirley is an employee and receives superannuation guarantee contributions of $5,000 every year from her employer. Shirley took maternity leave in the 2019-20 financial year and hasn’t made any personal tax-deductible contributions over the years. The following table summarises Shirley’s concessional contributions and available unused concessional contributions cap between the 2018-19 and 2023-24 financial years.
While clients won’t effectively be able to make catch-up concessional contributions until 2019-20, the impact of making contributions now on a client’s TSB needs to be considered if they would benefit from making a large personal deductible contribution in a future year under the catch-up concessional contribution rules.
In some cases, clients may be better off delaying contributing to superannuation to ensure their TSB is below $500,000 in the year they wish to utilise the catch-up concessional contribution rules.
This problem applies to those with superannuation balances that would exceed $500,000 as a result of making contributions.
It is not a concern for clients with low superannuation balances as their TSB will not exceed $500,000, nor is it a problem for clients with high superannuation balances as they would not be able to use the catch-up provisions anyway as their TSB would preclude them.
For those with a TSB that would exceed $500,000 as result of making contributions, an adviser may wish to compare the tax benefits of getting an amount into super now (so that catch-up concessional contributions will not be available) with the benefit of investing that amount outside super and then:
- salary sacrificing, or making personal tax-deductible contributions each year up to the annual concessional cap and then drawing down on the amount invested outside super to replace their lost income, or
- using the catch-up rules to make a large one-off personal deductible contribution in the future.
Carlos, 55, earns $85K and receives a $100,000 windfall on 1 July 2018 which he is keen to invest for the long term. Carlos’ has a super balance of $350,000 to which his employer contributes 9.5% SG. Carlos also owns an investment property which he plans to sell in 2022/23 for an estimated $500,000, realising a capital gain (after CGT discount) of $150,000.
In this case, we have compared the following contribution strategies:
Option 1 – Make a $100,000 non-concessional contribution on 1 July 2018. Under this option, Carlos won’t qualify for the catch-up concessional contributions in year 5 as his TSB would exceed $500,000
Option 2 – Invest the $100,000 outside super and then salary sacrifice up to the concessional cap each year and draw down on the amount invested outside super to replace lost cash flow. Under this option, Carlos would have used up all of his concessional contributions cap each year and therefore none would be available to be carried forward
Option 3 – Invest the $100,000 outside super and use the proceeds from the sale of the property to make a personal deductible contribution of $87,555 in 2022/23 using the catch-up of unused concessional contributions rules
In all three scenarios the additional tax liability as result of the capital gains incurred in year five will be deducted from the sale proceeds from the investment property.
The outcomes for each scenario at the end of 2022-23 are summarised as follows:
This analysis shows the strategy of investing the $100,000 outside super and using the property sale proceeds to make a personal deductible contribution of $87,555 in 2022-23 using the carry forward rules provides the best result. This is due to the combined tax benefits of making pre-tax rather than after tax contributions as well the increased value of the deduction in 2022-23 due to the capital gain pushing Carlos into a higher tax bracket in that year.
However, it’s important to note this outcome is dependent on the size of the future capital gain and the impact it has on his marginal tax rate in the year of disposal. For example, if the capital gain was smaller and did not push Carlos into a higher tax rate, Option 2 may provide a better result.
Therefore, it will be important to analyse each client’s situation to determine the optimal contribution strategy going forward.
Assumptions: Investment return of 6.5% both inside and outside of super, salary indexed to CPI of 2.5%, concessional contribution cap indexed to AWOTE of 3% pa. 9.5% Super Guarantee applies each year. All figures shown in future dollars
REDUCING TOTAL SUPERANNUATION BALANCE
Clients who are prohibited from making catch-up concessional contributions due to their TSB exceeding $500,000, may wish to consider the following strategies to reduce their TSB:
- 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
- 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
Paul is retiring at the end of the 2021-22 financial year. Paul’s final salary and unused leave payments bring his taxable income to $140,000 for that year. Paul has approximately $50,000 available from his termination payments to make additional contributions into super.
Paul has unused concessional contributions of $50,000 under the catch-up rules however he is unable to utilise this amount as his total superannuation balance on 30 June 2021 is $600,000.
As Paul has previously met a condition of release, the majority of his superannuation is unrestricted non-preserved component.
Paul could withdraw just over $100,000 immediately before 30 June 2021 so that his superannuation balance falls below $500,000. The tax savings Paul will receive from making an additional $50,000 as a personal deductible contribution is $12,000 (39% MTR less 15% contribution tax).
What about the amount withdrawn?
If Paul is able to contribute the withdrawn amount back into superannuation as either a spouse contribution or a non-concessional contribution, the funds would be returned to the concessionally taxed superannuation environment.
However, if the amount cannot be re-contributed, the tax on earnings when invested outside of superannuation needs to be considered.
The table below summarises the amount of additional tax Paul will pay on earnings generated from $100,000 if held outside of superannuation compared to tax of 15% within superannuation.
Whether this strategy is worthwhile will depend on a number of factors including the tax benefit from making the personal concessional contribution, the client’s marginal tax rate and investment timeframe.
POTENTIAL TAX AVOIDANCE ISSUE
In the ATO’s view, the main difference between tax planning and tax avoidance largely comes down to intent. Tax planning is organising your clients’ tax affairs in the most tax effective way within the intent of the law. In contrast, tax avoidance schemes involve the deliberate exploitation of the tax system. It is unclear which camp the act of making a lump sum withdrawal to reduce one’s total superannuation balance to qualify for catch-up concessional contributions would fall into. Clients should seek professional tax advice before proceeding.