Who should be using the “catch up” rules for concessional contributions before 30 June 2021?

These rules allow anyone who does not use the full amount of their concessional contributions cap in a particular year to carry the shortfall forward for up to five years and potentially “catch up” later. Who should be thinking about this in 2020/21?

The rules have been in place since 1 July 2018. Someone whose concessional contributions only amounted to $15,000 in 2018/19, for example, could carry the leftover $10,000 forward to future years, up to 2023/24. If it isn’t used in 2023/24 at the latest, it lapses.

To actually use the amounts carried forward, there is a specific rule: the person’s total superannuation balance at the previous 30 June must be less than $500,000. Hence in our example here, the extra $10,000 carried forward could be added to the individual’s normal concessional contributions cap in (say) 2023/24 as long as his or her total superannuation balance was less than $500,000 at 30 June 2023.

And in fact, they don’t need to wait until 2023/24. The individual in this example could use the extra $10,000 in 2020/21 as long as their total superannuation balance was less than $500,000 at 30 June 2020.

There are no special forms to be completed or boxes to tick on a personal tax return – the ATO will work out exactly how much has been carried forward and is available to catch up in this year. And the amount is simply added to the existing concessional contributions cap so contributions that feel special (because they are over and above the normal cap) are in fact treated in exactly the same way – they can be claimed as a tax deduction, split to an eligible spouse etc.

So in 2020/21, who should give serious consideration to doing their “catch up” with their carried forward amounts? These could come from 2018/19 or 2019/20 or both.

There are five main groups.

In all cases, and in all the examples below, we have assumed that the right conditions are met – the member’s balance was less than $500,000 at 30 June 2020, the member is allowed to make contributions (for example, they are under 67 or between 67 and 75 but met a work test or are eligible for work test exempt contributions) and, if the transaction involves using the concessional contribution cap by claiming a tax deduction for a personal contribution, the member has enough taxable income to make it possible and worthwhile.

Firstly, the obvious candidates are those who are in danger of exceeding the $500,000 limit at 30 June 2021. If their balance continues to climb they may find that this year is the last year in which the rules can be used. Consider a high earner who could do with a tax deduction but has so far used all spare cash to pay off their mortgage as quickly as possible. This year it might actually make sense to focus on superannuation before this lucrative opportunity disappears, even if that means drawing down a little on the extra mortgage payments.

A second easily forgotten group would be those whose balances were too high at 30 June 2019 and so they have mentally switched off from this opportunity. Remember that the $500,000 limit is only relevant in the year in which the catch up opportunity is actually used. Someone whose balance was too high at 30 June 2019 might well be eligible in 2020/21 if their balance dropped below $500,000 at 30 June 2020. And it doesn’t matter if it has recovered since then – the only critical date is 30 June 2020.

And what about those whose income is high this year but won’t be in the future? Someone who has sold a property and made a large capital gain this year so is in the top marginal tax bracket for 2020/21 but won’t be in the future? Now is the perfect time for anything that can provide a tax deduction – it’s never been so valuable (worth 45c in the dollar, less tax on the superannuation contribution) and won’t be so valuable in the future.

Paradoxically, sometimes the driver for using the concession this year rather than in the future is where earnings are in fact expected to be even higher next year. This one needs an example.

Mike earns $220,000 pa plus superannuation from his employment and a small amount of other income which is more or less offset by his personal tax deductions. The total of his taxable income plus superannuation contributions is $240,900 ($220,000 plus 9.5%). He expects a raise next year and of course compulsory superannuation contributions will increase to 10%. As a result, he thinks there’s a strong chance he will be pushed over an important threshold: $250,000. That means Mike will pay 30% tax on his concessional contributions rather than the normal 15%. So, let’s say Mike has a small amount of his concessional contribution caps from 2018/19 and 2019/20 that he didn’t use at the time (around $5,000 each year, a total of $10,000). If he uses the catch up rules this year, he gets a tax deduction at the top marginal rate (45% plus Medicare) but will pay 15% contributions tax on the contributions – the net benefit to him is around $3,200 in tax saved.  If, on the other hand, he wants until next year the net benefit will only be around $1,700 (45% plus Medicare less 30%). Of course, the bigger mystery here is why Mike is carrying forward any concessional contribution cap space at all. At his level of income, one would hope he is seriously thinking about using his full cap in 2020/21!

Finally, don’t forget the people who had caps in 2018/19 and 2019/20 but no way of using them. Perhaps 2020/21 is the year? Good examples here are clients in their 80s who are unwinding defined benefit pensions and want to distribute the resulting reserves. Even though they can no longer make concessional contributions, they can use the three years’ worth of caps to allocate the reserves tax effectively. And if they miss out this year because of the $500,000 total super balance requirement, remember they can put themselves under the threshold in the future by withdrawing money now in time for 30 June 2021.

Now that these catch up concessional contribution cap rules have been in place for a couple of years, it’s worth considering whether or not they can and should be used this year. There is no need to wait until the end of five years – if it makes more sense to use them in 2020/21 then do it. It is a bird in the hand, after all.

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