Carry forward of unused concessional contributions cap

Financial advisers will need to consider whether their client’s current strategy will still be optimal after the concessional contribution changes come into effect, Craig Day writes.

Although the new catch up concessional contributions rules do not come into effect until 1 July 2018, advisers may still need to consider these rules when implementing current strategies as what a client does now could impact their ability to use these rules in the future.

Under the new rules, individuals eligible to contribute who have a total superannuation balance of less than $500,000 just before the start of a financial year can increase their concessional contributions cap in the year by applying unused concessional contribution cap amounts from one or more of the previous five financial years.

Commencement date

Only the unused concessional contributions cap 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 contribution cap amounts is the 2019/20 financial year.

$500k total super balance eligibility criteria

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To qualify for the carry forward of unused concessional contributions caps, the value of an individual’s total super balance (TSB) immediately before the start of the relevant financial year (i.e. the 30 June value) must be less than $500,000. While the basic concessional contributions cap is indexed by average weekly ordinary time earnings (AWOTE) in increments of $2,500, the $500,000 TSB threshold is not indexed. 

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 their 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 due to benefit payments where a member has satisfied a condition of release.

Amount of unused concessional contributions

The amount of the 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 years. 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.

Where a member has unused concessional cap amounts from a number of years, they are required to apply any unused cap in the order of 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. 

Taking into account the annual $25,000 concessional cap, this means a person with a TSB of less than $500,000 could theoretically make concessional contributions of up to $150,000 in a year without exceeding the cap where no concessional contributions were made in the previous five years and assuming no increase in the concessional cap, i.e. $25,000 x 5 + $25,000.

Case study 1

Shirley is an employee and receives super guarantee (SG) contributions of $5,000 every year from her employer. Shirley took maternity leave in the 2019/20 financial year and hasn’t made any deductible personal contributions over the years. The table below summarises Shirley’s concessional contributions and available unused concessional contributions cap between the 2018/19 and 2023/24 financial years.

Strategic considerations

While clients won’t effectively be able to make any catch-up concessional contributions until the 2019/20 year, advisers may still need to take these rules into account when determining a client’s optimal contribution strategy now.

Non-concessional contribution vs concessional contribution

Taking into account the changes to the personal deductible contribution rules from 1 July 2017 as well as the introduction of the catch up concessional contribution rules on 1 July 2018, advisers will not only need to consider whether a client should be making concessional or non-concessional contributions but also what impact any non-concessional contributions may have on their ability to make large personal deductible contributions under the bring forward rules in the future.  

For example, where making non-concessional contribution now is likely to impact a client’s ability to make a large personal deductible contribution in the future, an adviser may wish to compare the tax benefits of getting an amount into super now with the benefit of investing that amount outside super and then: 

• The client salary sacrificing, or making personal deductible contributions, each year up to the annual concessional cap and then drawing down on the amount invested outside super to replace their lost income; or
• Using the catch-up rules to make a large one-off personal deductible contribution in the future.

Case study 2

Carlos, 55, earns $85,000 and received a $100,000 windfall on 1 July 2018 which he is keen to invest for the long-term. Carlos has a super balance of $350,000 to which his employer contributes 9.5 per cent SG. Carlos also owns an investment property which he plans to sell in 2022/23 for an estimated $500,000, realising a capital gain of $150,000.

In this case, we have compared the following contribution strategies:

• Option 1 – make a $100,000 NCC on 1 July 2018;
• Option 2 – invest the $100,000 outside super and then salary sacrifice up to the concessional cap each year and draw down on the amount invested outside super to replace lost cash flow; or
• Option 3 – invest the $100,000 outside super and use the proceeds from the sale of the property to make a personal deductible contribution of $87,555 in 2022/23 using the carry forward of unused concessional contributions rules.

The outcomes for each scenario are summarised in the table below.

This analysis shows the strategy of investing the $100,000 outside super and using the property sale proceeds to make a personal deductible contribution of $87,555 in 2022/23 using the carry forward rules provides the best result. This is due to the combined tax benefit of making pre-tax rather than after tax contributions as well as the increased value of the deduction in 2022/23 due to the capital gain pushing Carlos into a higher tax bracket in that year.

However, it’s important to note this outcome is dependent on the size of the future capital gain and the impact it has on his marginal tax rate in the year of disposal. For example, if the capital gain was smaller and did not push Carlos into a higher tax rate, Option 2 may provide a better result.      

Therefore, it will be important to analyse each client’s situation to determine the optimal contribution strategy going forward.  

Craig Day is head of FirstTech at Colonial First State.