Unlock the benefits of Catch-Up Contributions: A Comprehensive Guide
The bring forward 5-year catch-up provisions for concessional contributions are an effective tax planning tool. They not only help you boost your retirement savings but also allow you to substantially minimise your income tax for this year or even capital gains for assets sold this financial year.
How Does This Work?
To use the 'Catch-Up' provisions, you need to meet the following eligibility criteria:
Super Balance: Your total super balance must be less than $500,000 on the 30th of June of the previous financial year.
Unused Concessional Contribution Caps: You must have unused concessional contribution cap amounts from one or more of the previous five financial years, starting from the 2018-19 financial year.
Concessional Contributions Caps for the Previous 5 Years:
- 2018-19: $25,000
- 2019-20: $25,000
- 2020-21: $25,000
- 2021-22: $27,500
- 2022-23: $27,500
If your employer or personal contributions fell below these caps in any of these financial years, those amounts make up your 5-year catch-up amount, excluding the current financial year.
For example, if your employer contributed $20,000 in Superannuation Guarantee payments each year over the last 5 years and no other salary sacrifice or personal contributions were made, you would have a cumulative unused cap of $30,000:
- 2018-19: $5,000
- 2019-20: $5,000
- 2020-21: $5,000
- 2021-22: $7,500
- 2022-23: $7,500
To find out your catch-up amount, check your MyGov account or contact us or your accountant. To access the catch-up amounts for the previous 5 financial years, you must ensure that your concessional contributions (employer, personal, and salary sacrifice contributions) for the current financial year reach the $27,500 limit.
Example 1: Boosting Retirement Savings for an Employee
Scenario: Jason earns $180,000. His employer contributes 11% to his super fund, and his super balance was less than $500,000 on 30 June 2023. He has $40,000 in cumulative unused caps available that he would like to contribute to his super fund.
Calculations:
- Annual Employer Contributions: $180,000 * 11% = $19,800
- Additional Contribution Needed: $27,500 - $19,800 = $7,700
- Total Concessional Contributions for 2024: $27,500 (annual cap) + $40,000 (unused cap) = $67,500
Tax Savings:
- Marginal Tax Rate: 39% (including Medicare levy)
- Super Tax Rate: 15%
- Tax Savings: $47,700 * (39% - 15%) = $11,280
By making the maximum concessional contributions, Jason can save $11,280 in tax while significantly boosting his retirement savings.
Example 1: Minimising Capital Gains Tax
Scenario: Janice hasn't worked for over 6 years and has made no super contributions in this time. She sold an investment property and made a capital gain of $400,000. Her super balance is $202,000.
Total Concessional Contributions:
- Annual Cap Contributions: $27,500
- Catch-Up Contributions: $130,000
- Total Contributions: $27,500 + $130,000 = $157,500
Taxable Capital Gain:
- Initial Capital Gain: $400,000
- Less Concessional Contributions: $157,500
- Remaining Capital Gain: $400,000 - $157,500 = $242,500
Tax Savings:
- Marginal Tax Rate on Capital Gains: 39% (assuming top tax bracket)
- Super Tax Rate: 15%
- Tax Savings: $157,500 * (39% - 15%) = $37,800
By using the catch-up contributions, Janice can reduce her taxable capital gain, resulting in a tax saving of $37,800 while also enhancing her retirement savings.
Beware of the Traps: Catch-Up Contributions
The catch-up provisions for concessional contributions offer a valuable opportunity to boost your retirement savings and reduce your taxable income. However, there are important traps to be aware of to avoid unexpected tax liabilities.
Trap 1: Lodging a Notice of Intent (NOI)
To claim a tax deduction on your catch-up contributions, you must lodge a Notice of Intent (NOI) with your super fund. This step is crucial; without it, your tax deduction is invalid. Ensure you provide the NOI within the required time frames: either before lodging your tax return for the financial year the contribution was made or by the end of the following financial year.
Trap 2: Division 293 Tax Implications
Your employer contributions, salary sacrifice/personal contributions, and additional catch-up contributions are added to your assessable income for Division 293 tax purposes. If your combined income and concessional contributions exceed $250,000, you may be liable for an additional 15% Division 293 tax.
Example: Potential Pitfalls for High Income Earners
Scenario: Jarod earns $220,000. His employer contributes 11% in Super Guarantee (SG) payments, and he has $50,000 in cumulative unused caps. He assumes that by using the catch-up provisions, he will only pay 15% contributions tax, instead of his marginal tax rate of 47%. His super balance was less than $500,000 on 30 June 2023.
Calculations:
- Employer Contributions: $220,000 * 11% = $24,200
- Additional Contribution Needed: $27,500 - $24,200 = $3,300
- Total Concessional Contributions: $27,500 + $50,000 = $77,500
Assessable Income for Division 293:
- Income: $220,000
- Concessional Contributions: $77,500
- Total Assessable Income: $220,000 + $77,500 = $297,500
Since $297,500 is above the Division 293 threshold of $250,000, the Division 293 tax applies.
Division 293 Tax Calculation:
Division 293 tax is payable on the lesser of: $77,500 (total concessional contributions) and $47,500 (income over $250,000).
Division 293 Tax Payable: 15% of $47,500 = $7,125
The Division 293 tax of $7,125 represents an additional 15% tax on $47,500 of the concessional contributions. Therefore, while concessional contributions are generally taxed at 15%, this portion is effectively taxed at 30% due to the Division 293 tax.
Trap 3: Other Factors Increasing Assessable Income for Division 293
Negative Gearing Amounts: If you have investment properties, the net rental loss (the amount by which your rental expenses exceed your rental income) is added back to your assessable income. This can significantly increase your total income for Division 293 calculations.
Reportable Fringe Benefits: Non-cash benefits provided by your employer, such as a company car, subsidized loans, or health insurance, are considered reportable fringe benefits. These amounts are added to your taxable income for Division 293 purposes, even though they might not be taxable under normal income tax rules.
Trust Distributions: Income received from trusts, such as family trusts or investment trusts, is also included in your assessable income. These distributions, whether in the form of interest, dividends, or capital gains, are taxable and can push your income above the Division 293 threshold.
These factors can unexpectedly increase your assessable income, potentially triggering additional Division 293 tax. It's crucial to account for these when planning your contributions to avoid being caught out by higher tax liabilities.
Conclusion: Maximising the Benefits of Catch-Up Provisions
The catch-up provisions for concessional contributions are a powerful tool to significantly boost your superannuation and provide a risk-free return on investment. They also offer the potential to reduce your taxable income, thereby lowering your tax payable.
However, it is crucial to navigate these provisions carefully to avoid potential pitfalls.
There are several traps to be aware of, such as the requirement to lodge a Notice of Intent (NOI) to claim tax deductions and the potential for additional Division 293 tax if your assessable income exceeds $250,000.
Factors such as negative gearing amounts, reportable fringe benefits, and trust distributions can unexpectedly increase your assessable income, leading to higher tax liabilities.
To ensure you maximise the benefits and avoid any unexpected tax consequences, it’s essential to consult with your Tax Effective Tax Specialist. They can help you understand your eligibility, calculate your catch-up amounts, and plan your contributions effectively.
Before making any contributions, have a chat with your tax advisor to make informed decisions and optimise your financial strategy.
