Written by Hudson Adviser Ivan Fletcher
Warning – Politically Contentious Subject - Bill Shorten has indicated that he would scrap this relatively new legislation under a Labor Government.
Under recently passed legislation - Clients with a total superannuation balance below $500,000 can carry forward any unused conessional cap amounts for up to five financial years. This allows those who do not use all of their concessional cap (currently $25,000) in a given year, to carry forward their unused concessional cap amounts to offset taxable income or capital gains in future years.
As always the Devil is in the detail and the 'Criteria to Qualify' and 'Critical Dates' yield critical information as to whether this strategy can apply to you.
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.
2018/19 First Year of accrual - of unused Concessional Contributions
2019/20 First Year of Use of carried forward unused Concessional Contributions
THE CRITERIA TO QUALIFY
Criteria 1 - You must first qualify to make a voluntary contribution?
You may qualify to make a voluntary contribution to super via one of the following conditions at the time of the contribution;
- Under age 65
- Between age 65 and 74 and have satisfied the Work Test (40 hours in 30 days)
- Between age 65 and 74 and qualify for the NEW Work Test Exemption
Work Test Exemption - Explained
The Work Test Exemption is relatively new leglslation that applies from 1 July 2019.
- You meet the work test in the previous financial year, AND
- Your total superannuation balance (across all your super and or pension accounts) is less that $300,000 (as of 1 July in the year of contribution) AND
- The Work Test Exemption has not been used in a previous financial year.
Criteria 2 - Total Superannuation Balance (TSB) Less Than $500,000
To be eligible to make catch-up concessional contributions in a year you must have a 'total super balance' of less than $500,000 as at 30 June at the end of the financial year immediately preceding the financial year in which the contribution is to be made.
Year by Year - 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 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.
CALCULATING - 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 yeras. 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 or any year in-between.
Where a member has unused concessional cap amounts from a number of yeras, they are required to apply any unused cap in the order of the 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.
At the Extreme - Taking into account the annual $25,000 concessional cap, this means a person with TSB of less than $500,000 could theoretically make concessional contributions of up to $150,000 in the financial year 2023-24 without exceeding the cap where no concessional contributions were made in the previous five years and assuming no incraese in the concessional cap. ie $25,000 x 5 + $25,000.
STRATEGIC CONSIDERATIONS FOR APPLICAION OF THIS STRATEGY
- Inconsistent income years. If you have a low income year followed by a high income year due (eg's leave without pay, taking LSL on half pay, or substantial periods of unemnployment or in the year of a large Bonus or Trust distribution).
- Abnormally large taxable income years in the future such as a significant work Bonus, or a Capital Gains Event (from the sale of shares, property or business).
STRATEGIES - For Reducing Total Superannuation Balance (below $500,000)
For those with a Total Super Balance approaching the $500,000 balance or even slightly over, there are some strategies worth considering to reduce or limit your TSB to assist in qualifying for Criteria 2 (per this article).
- Spouse contribution splitting - this may need to be implemented over a number of yeras as splitting is limited to 85% of concessional contributions made in the previous financial year.
- For those above preservation age, you can commence a transition to retirement pension and take pension payments up to 10% of balance (subject to tax for clients under age 60).
- Lump sum withdrawals from superannuation/pension if you meet a condition of release.
- Delaying contributing to superannuation to ensure your TSB is below $500,000 in the year you wish to utilise the catch-up concessional contribution plan.