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How to take advantage of super contribution strategies

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Superannuation tax deductions have generally fallen into the ‘use it or lose it’ category. But from 1 July 2019, you have had the ability in certain circumstances to catch up on previous under-utilisations of the annual maximum deductible super contributions caps.
 
This means that you might be able to catch up on your concessional contributions this year and still have access to the future tax benefits down the track.
 
What are concessional contributions?
Concessional contributions (CCs) include:
 

• employer contributions (including superannuation guarantee and contributions made under a salary sacrifice arrangement)
• personal contributions claimed as a tax deduction.

 
CCs are generally taxed at 15% upon entry to your super fund and are not counted as personal taxable income. If your total personal income (including super contributions) exceeds $250,000 you may pay an extra 15% tax on some or all of your concessional contributions.
 
If you have more than one fund, any CCs you make to all of your funds are aggregated and counted towards the concessional contributions cap.
 
What is the concessional contributions cap?
Currently the CC cap is set at $25,000 per financial year but this is set to increase to $27,500 from 1 July 2021 in line with inflation.
 
How does the unused concessional cap carry forward work?
Since 1 July 2019, if your total superannuation balance was less than $500,000 as at the end of the previous financial year, you may have been entitled to contribute more than the general $25,000 CC cap and make additional CCs for any unused amounts accrued in 2018–19 and subsequent years.
 
The first year you were entitled to contribute unused amounts was the 2019–20 financial year. Unused amounts are available for a maximum of five years, and after this period will expire.
 
Example:
Dr Kay is a 55-year-old, self-employed GP who earns $180,000 per annum. Historically, Kay has not been focused on adding money to super, so made no contributions in 2018–19 or 2019–20. Her current super balance is approximately $250,000.
 
Kay has the opportunity in 2020–21 to take advantage of these carry-forward provisions, so contributes $75,000 to super this year (being $25,000 each for 2018–19, 2019–20 and 2020–21). As a result, she will effectively save $28,575 in tax that would otherwise have been payable in her own name.
 
The contributions into her fund will be taxed at 15%. This means that Kay has saved $17,325 in net tax by using this strategy.
 
Bringing forward next year’s concessional contributions
For those that have a self-managed superannuation fund, subject to your fund’s rules, it is possible to make a CC in June which you can claim as a personal tax deduction in the current year but which the super fund sets aside into a reserve to be counted towards the following year’s contribution cap.
 
This strategy can effectively allow you to bring forward next year’s superannuation contributions into this year so might prove very effective in a year of abnormally high income.
 
Example:
Dr Tim’s 2020–21 income is abnormally high and he is anticipating a significant reduction in income in 2021–22 due to changed work circumstances. In consultation with his super fund, he makes two CCs before 30 June 2021 – $25,000 for the 2020–21 year (which the fund allocates to him this year) and $27,500 for the 2021–22 year (which the fund puts into a reserve for next year). 
 
Tim benefits from the difference in tax rates by being able to claim his 2021–22 contributions in a year when he is paying a higher marginal tax rate.
 
The power of non-concessional super contributions
Non-concessional contributions (NCCs) represent funds added to superannuation where you do not claim a tax deduction on the contribution.
 
Whilst there are no immediate tax benefits from such contributions, the real power comes from the fact that:
 

• earnings in the fund are only taxed at a maximum of 15% (10% for capital gains)
• future fund earnings are taxed potentially at 0% when you retire and access your superannuation as a pension.

 
However, there are restrictions on NCCs, hence it can make sense to start earlier rather than later:
 

• There is an annual cap on NCCs (it is possible to make three years’ NCCs in one lump sum)
• You cannot make NCCs once your fund balance exceeds a certain level (currently $1.6m in 2020–21)

 
Examples used are for illustrative purposes only and are not an estimate of the investment returns you will receive or fees and costs you will incur. You need to consider your financial situation and needs before making any decisions based on this information.
 
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financial literacy superannuation tax

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