If you are one of those people that are looking for opportunities to maximise your super and claim a tax deduction along the way, there are strategies that may help.
However, like most things relating to superannuation, there are some conditions attached.
In this blog, I will focus on concessional contributions and the ability many people have to exceed their annual concessional contribution cap without adverse tax consequences.
Concessional contributions are those contributions made to a superannuation fund by an employer, on behalf of their employees. Employer contributions include the compulsory 10.5% ‘superannuation guarantee’ contributions, contributions made under a salary sacrifice arrangement, and other discretionary contributions an employer may make.
Personal contributions are also concessional contributions when a tax deduction is claimed for the contribution.
Concessional contributions are treated as taxable income of the superannuation fund to which they are made, meaning they are taxed within the super fund at a rate of 15%. This is sometimes referred to as ‘contributions tax’.
The current annual cap or limit on concessional contributions is $27,500.
Where concessional contributions exceed this annual cap, an excess concessional contribution arises. Exceeding the cap is something that should generally be avoided. When a contribution exceeds the cap, the excess will be taxed at a person’s marginal tax rate.
Before 1 July 2018, if a person didn’t fully use their concessional contribution cap in a particular financial year, the unused portion was lost.
From July 2018 this changed.
Subject to meeting certain conditions, a person may now carry forward the unused portion of their concessional contribution cap, which has accrued since 1 July 2018, for up to five years.
However, there is one condition that needs to be satisfied.
To be able to carry forward the unused portion of the concessional contribution cap, a person must have a total superannuation balance of less than $500,000.
The total superannuation balance is the value of all superannuation a person holds, including pension accounts, calculated on the previous 30 June [1].
By way of example, Bertina had a superannuation account with a balance of $58,000 and an account-based pension with a balance of $420,000 on 30 June 2022. Her total superannuation balance is $478,000.
Therefore, she has met the first condition enabling her to carry forward the unused portion of her concessional contribution cap that has accrued since 1 July 2018, to the 2022-23 financial year.
Let’s assume that Bertina is 64 years old and retired. In 2022-23 she sold an investment property that resulted in a capital gain of $100,000 being added to her other assessable income.
Bertina’s concessional contribution cap for 2022-23 is $27,500.
In this circumstance, Bertina could make a personal contribution to superannuation and claim a tax deduction of $27,500 to help offset the tax payable on her income, including her capital gain.
However, if she has any unused concessional contribution cap that has accrued since 1 July 2018, she is able to carry the unused cap forward to 2022-23.
For the sake of this conversation, let’s assume that the unused cap from 1 July 2018 through to 30 June 2022 totals $50,000. Bertina is able to make a personal tax-deductible contribution to superannuation of up to $77,500 in 2022-2023.
This will go a long way towards reducing the tax she might otherwise be paying on her capital gain.
When it comes to making superannuation contributions, tax is just one consideration.
As mentioned earlier, tax-deductible superannuation contributions, such as the one Bertina intends to make, are treated as taxable income of the superannuation fund. In this example, the contributions tax that will be deducted from Bertina’s contribution of $77,500 is $11,625.
Before claiming the tax deduction for personal superannuation contributions, Bertina will need to ensure that her personal income tax rate is 15% or more, otherwise, she could end up paying more tax than necessary.
People are generally able to make concessional contributions to super if they are under 67 years of age. From 67 through until turning 75, they will need to have met a work test, or be eligible for the work test exemption, to make personal contributions to super.
For those that are employed, carrying forward the unused concessional contribution cap can be useful when looking to make contributions under a salary sacrifice arrangement, or even when topping up concessional contributions by making personal tax-deductible contributions.
Like most things involving superannuation, there are a lot of moving parts – multiple issues to be considered.
When looking to maximise contributions to superannuation we highly recommend you consult with a qualified financial adviser to ensure the strategy is appropriate.
[1] Special rules apply for members of defined benefit superannuation funds and for pensions other than account-based pensions
