Clients with lower superannuation balances may soon have the opportunity to boost their retirement savings by making additional concessional contributions (CCs) above the standard CC cap. This measure, announced as part of the Government’s Super Reform package, allows eligible individuals to carry-forward their unused CC cap from a prior financial year and use it to increase the amount of CC cap they have available in a later year.
The new carry-forward provision applies over a rolling five year period, so some forward planning may be required for clients looking to maximise the amount they are able to contribute to superannuation under these rules.
How does the carry-forward of unused CC cap work?
From 1 July 2018, if a client’s CCs in an income year are less than the standard CC cap ($25,000 in 2018/19), they will be able to carry-forward the unused cap amount for up to five income years. The client’s unused cap will accrue each year over the five year carry-forward period.
Where a client meets certain eligibility conditions (outlined below), they will be able to utilise their accrued unused CC cap from the 2019/20 income year. Applying the unused cap increases the maximum amount of CCs that can be made without excess contributions arrangements applying. The unused CC cap that has not been applied after five income years will no longer be available.
It should be noted that only the unused CC cap from 2018/19 onwards can be carried forward. Any CC cap remaining from 2017/18 or earlier years is not available to carry-forward.
Peter, age 48, earns $100,000 per annum and has approximately $400,000 in accumulated superannuation as at 30 June 2018. The only superannuation contributions being made by Peter or on his behalf are Superannuation Guarantee (SG) contributions (currently $9,500 per annum) paid by his employer.
Peter’s unused CC cap in 2018/19 will be $15,500 (ie $25,000 CC cap less $9,500 SG contributions). His unused CC cap will accrue each year until it is either used or falls outside the five year carry-forward period.
Chart 1 below illustrates Peter’s total CC capacity over a seven year period. The dark green line is the standard CC cap of $25,000.1 The dark green shaded area represents Peter’s actual CCs each income year and the light green shaded area is his unused CC cap each year, which is carried forward. The grey shaded area represents Peter’s accrued unused CC cap from year to year.
The unused cap continues to increase until 2023/24 when Peter reaches his maximum CC carry-forward position. This is the point where he’ll be able to apply his unused CC cap of $78,500 from the prior five financial years, assuming he meets the eligibility conditions outlined below. This unused CC cap is applied in addition to the standard CC cap estimated to be $27,500, bringing his total CC capacity in 2023/24 to $106,000. In 2024/25, Peter’s unused CCs from 2018/19 will no longer be available as it is outside the five year carry-forward period.
Chart 1:Peter’s total CC capacity
To be eligible to make additional CCs in a financial year using the new carry-forward provision, the client must:
- make CCs that exceed the standard CC cap
- have a total superannuation balance 2 (TSB) as at the prior 30 June of less than $500,000
- have unused CC cap available from one or more of the prior five financial years.
Importantly, a client’s TSB does not affect their ability to accrue their unused CC cap from year to year. However, it will be relevant at 30 June just prior to the financial year they are intending to apply their unused CC cap. For example, if a client intends to apply their unused CC cap in the 2021/22 financial year, their TSB as at 30 June 2021 must be less than $500,000.
Total superannuation balance
Where a client is considering using their carried-forward CC cap, it will be important to review their TSB, particularly if it is likely to be close to the $500,000 threshold. Certain transactions, such as spouse contribution splitting and contributions or withdrawals (where relevant) that occur around 30 June of the relevant financial year will impact the client’s TSB and potentially their eligibility to apply their unused CC cap.
Peter expects to have surplus income available to make additional CCs in 2021/22 when he plans to sell an investment property. He consults his adviser about whether he would be eligible to use the new carry-forward provision to access his unused CC cap from prior years given that his TSB is currently around $400,000.
Assuming Peter continues to receive SG contributions each year and his superannuation fund achieves a net annual return of 6.53 per cent, Peter’s adviser calculates his TSB to be around $510,000 at 30 June 2021. If Peter implements spouse contribution splitting from the 2017/18 income year and splits 85 per cent of his CCs each year with his spouse Paula, his TSB is estimated to be around $483,000 at 30 June 2021. The difference in Peter’s TSB over this period is shown in Chart 2 below.
By splitting his CCs each year, Peter’s TSB remains below the $500,000 threshold, meaning he will be able to access his accrued unused CC cap in 2021/22.
Chart 2: Peter’s superannuation balance
Note that superannuation funds are not required to offer a spouse contribution splitting service. Advisers considering this strategy should check with their client’s superannuation fund to ensure the service is available.
Applying the unused CC cap
If a client’s CCs exceed the standard CC cap in 2019/20 or a later year and they meet the eligibility conditions outlined above, their accrued unused CC cap will be applied to increase their CC cap for that financial year. The increase in the CC cap is limited to the amount by which the client’s CCs would otherwise exceed the cap. Where a client has unused CC cap from multiple financial years, the earliest unused cap will be applied first.
Peter sells his investment property in 2021/22 realising a discounted capital gain of $60,000, which is included in his assessable income for the year.
He uses some of the sale proceeds to make a personal contribution of $60,000 to superannuation, which he intends to claim as a tax deduction. The tax deduction for the contribution will offset the increase in Peter’s assessable income arising from the realised capital gain.
This contribution brings his total CCs to $70,000 in 2021/22, including his SG contributions, which have increased to $10,000. If the standard CC cap remains at $25,000, Peter will otherwise have excess CCs of $45,000. However, as illustrated in Chart 1, by 2021/22 Peter will have accrued $46,500 of unused CC cap, which he may be able to access if his TSB is less than $500,000 as at 30 June 2021.
Assuming Peter meets the eligibility conditions outlined above, $45,000 of his accrued unused CC cap will be applied to increase his CC cap to $70,000 in 2021/22, as shown by the dark green line in Chart 3 below. He will then have $1,500 of accrued unused CC cap remaining which will be carried forward until it is either applied or falls outside the five year carry forward period.
Chart 3: Peter makes a $60,000 personal contribution
As a result, Peter is able to contribute $45,000 more than he would have otherwise been able to under the standard CC cap. He is also able to reduce the tax liability that would have applied to the capital gain by $14,400. This is calculated as the difference between tax on the gain at his marginal tax rate of 39 per cent (including Medicare levy) and the 15 per cent fund tax rate that is applied to CCs.
Note that high income earners may also be subject to Division 293 tax on additional CCs made under the carry-forward provisions, where their income exceeds $250,000.3
The ability to make catch up CCs may assist those clients with low superannuation balances to accumulate additional retirement savings. However, to take advantage of this measure, clients will need to have the financial capacity to be able to fund the additional CCs. While this may be a challenge for some clients, other clients may be able to utilise surplus income or non-superannuation investment assets to fund the contribution. For clients using non-superannuation assets, the additional CCs may also assist in offsetting some of the tax liability on any realised capital gains.