For many of us, additional tax savings are being left on the table.
Catch-up concessional contributions allow you to take advantage of the accumulated unused portions of your individual concessional contribution caps across the last five years. The overall tax savings available can be considerable, and when appropriately applied within your overall financial strategy they can be incredibly beneficial.
But did you know these rules provide additional opportunities for those with Self Managed Super Funds (SMSF)?
What Are Concessional Contributions?
A quick re-cap on catch-up concessional contributions and what they allow. The current concessional contribution cap limits before-tax income contributed to super to $30,000 per financial year. It is important to remember before-tax income includes compulsory employer contributions and voluntary payments such as salary sacrifice and personal deductible contributions. Such payments are taxed at 15% upon payment to your superannuation fund. This is in contrast to an after-tax wage, which is taxed at your marginal tax rate when paid to your bank account.
Prior to 2018, any unused portion of your annual cap was essentially lost at the turn of the financial year. With the introduction of catch-up concessional contributions for the 2019/20 financial year, individuals with total super balances below $500,000 (as at 30 June the previous financial year) can now utilise up to the total of the previous five years’ worth of unused concessional caps.
Applying Catch Up Concessional Contributions
Generally speaking, it is not financially practical to contribute the maximum permitted concessional amount of $30,000 to super every year. However, individuals may find opportunities to make occasional, one-off contributions which take advantage of accrued catch-up contribution allowances.
Typical situations may involve receiving one-off bonuses, family inheritances or long service leave as a lump sum. By utilising any catch up concessional contributions available to them, individuals can ensure these larger lump sum amounts are efficiently transferred into super where they can be invested in a tax effective manner.
Business owners with varying year to year incomes may also aim to take advantage of these rules to ensure a consistent contribution to their super over the long term.
Tax Efficiencies
As catch up concessional contributions are tax deductible and can be used to reduce your taxable income, a well-timed contribution to super can be utilised to minimise capital gains incurred from the sale of an asset such as an investment property. Forward planning can ensure there is sufficient cap space to offset any capital gains in the year of sale.
Large one-off deductible contributions can also offset taxable income in high-earning years.
Opportunities Within an SMSF
In the context of a couple managing their own SMSF, it is important to remember that contribution limits are not applied to the fund itself. Rather, each member has their own balance recorded within the fund, contribution caps and carry-forward entitlements.
Strategically combining any unused catch up allowances can be highly effective and a good financial plan can extend to the following –
Retirement preparation:
- Catch-up contributions allow those who paused work or had lower contributions earlier in their careers to accelerate savings later
Balance equalisation between members within an SMSF:
- Assists both members ensuring their individual super balances stay under transfer balance caps when starting pensions
Investment timing:
- Contributions can be coordinated to fund new investments or rebalancing existing portfolios within the SMSF
We Are Here to Help
When making additional contributions to their super, individuals should be extremely mindful of their timing. Their total super balance must be under $500,000 as at the previous 30 June to be entitled to make use of the catch up concessional contribution rules. Any contributions need to be received by the super fund by 30 June to be considered as having been made within that financial year. Lastly, it is important to ensure that the fund or SMSF administrator is aware of the nature of the contributions. Good communication with the SMSF administrator is important, as is ensuring any Notice of Intent to Claim forms are lodged and processed before submitting your tax return.
It is important to remember the importance of good record keeping and administration of the SMSF by the fund’s accountant or third party. Where appropriate we work closely with Peak Super, a SMSF administrator to ensure your fund is appropriately administered and audited.
Financial advisers can assist with ensuring all of the above requirements are met.
Summary
In summary, catch up concessional contributions are a valuable opportunity to maximise the growth of your super fund, reduce your tax and ensure investments are made in a tax effective manner. It is recommended to be mindful of unused cap allowances and individual super balances, plan ahead and seek tailored advice to make the most of the flexibility the rules offer.
About Us
At Catapult Wealth, we provide personal, friendly advice to help you achieve your financial goals and build your wealth with confidence.
To discuss how catch-up concessional contributions could fit into your superannuation strategy, email advice@catapultwealth.com.au or call (08) 8172 9111.