This year is slightly unusual in a couple of respects when it comes to contributions. That makes it even more important to get the planning right well before 30 June 2024.
Perhaps most importantly : for those eligible to use the 5 year “catch up” contribution rules for concessional contributions, this year (2023/24) is the last year in which the unused cap carried forward in the very first year of the scheme (2018/19) can be used. Next year, it drops off because these amounts can only be carried forward for 5 years.
A good example would be (say) Anna (45) who had $400,000 in super at 30 June 2023. That means she can use these catch up rules this year if she wants to.
Each year her employer puts in the compulsory super contributions and Anna doesn’t salary sacrifice anything extra – that’s something she’ll do in a few years when she gets really serious about retirement. But these days she’s in a high tax bracket (she earns $150,000 and so her marginal tax rate is 37% plus the Medicare Levy). She’d quite like some tax deductions and she can see that the tax she pays on her income is quite a bit higher than the superannuation rate of 15%.
I hope Anna’s accountant is reminding her that back in 2018/19, she only used part of her concessional contributions cap and she has (say) $10,000 of it left. She’s able to use it this year – but once we reach 1 July 2024, the opportunity will have gone forever. She can only use the caps she has leftover from 2019/20 onwards.
Note she would need to use all of this year’s cap ($27,500) first before being allowed to use the $10,000 she has left from 2018/19. Unfortunately she can’t elect to use that $10,000 while carrying forward some of her 2023/24 concessional contributions cap for future use.
But if she can manage it, there’s a $10,000 tax deduction up for grabs in 2023/24 that will otherwise go begging.
Even if she can’t do it this year (and so loses out on the $10,000 from 2018/19), she shouldn’t wait too long. Each year, another unused amount from 5 years ago will drop away. And of course, once her balance goes over $500,000, she won’t be able to use any of the other years’ cap amounts that she’s carried forward.
On that front, there’s a trick to bear in mind if Anna has a partner who is already too late to use his old concessional cap amounts. Let’s say her husband Greg has $600,000 in super. To hang on to her options for as long as possible, Anna could think about “splitting” all her concessional contributions (even the Super Guarantee ones made by her employer) to Greg. In effect, they come into her super account during the year but get moved to his in the following year. That will allow her to keep adding money to super (using all possible tax deductions) without growing her balance too quickly (ruling her out of using the carry forward rules). Once Anna has more than $500,000 in super, Greg can return the favour and split his future concessional contributions to Anna.
(This would also make sense if Greg didn’t have any unused concessional cap amounts to carry forward or if his super contributions were subject to Division 293 tax.)
If I’d written this article two weeks ago, one of the points I would have made is that the Stage 3 tax cuts will make a big difference to the tax paid by people on high incomes. And while they may not come in exactly as planned the principles are still the same. Many people will find they pay less tax next year than this year.
In a way, that incentivises them to contribute as much as they can this year via concessional contributions because the deduction is “worth more” in 2023/24 than 2024/25.
Let’s look at Lesley (50) who is already very focused on her retirement and in the last few years has made sure she salary sacrifices enough to use her concessional cap in full. Even after doing this, her taxable income is still around $190,000. She has carried forward contributions of $20,000 from 2018/19, 2019/20, 2020/21 and 2021/22 previous years and her plan was to use these at the rate of around $5,000 a year (via extra salary sacrifice contributions) in 2023/24 and for the next few years before her super balance exceeded $500,000.
But in 2023/24 she is paying tax at the top marginal rate and won’t be in the future (even under the Government’s proposed changes, the top marginal tax rate applies from $190,000). If she makes extra salary sacrifice contributions in the future, they’ll only be saving her tax at 37% + Medicare.
In contrast, if she doubled down on this year’s contributions and made extra concessional contributions of say $10,000 she’s getting a tax deduction worth 45% + Medicare. (Of course, the contribution will be taxed in her super fund but either way, it’s worth more this year than it will be next year).
She shouldn’t go too far with this. If she decided to use up the full $15,000 that she’s carried forward in 2023/24, it would be a bit of a waste. Her taxable income would be down to $175,000. At that level, some of her tax deduction is only worth 37% + Medicare which is exactly the same as next year – there’s no value in doing it any earlier than she’d planned.
We’ll cover concessional contribution opportunities and more in our next Quarterly Technical Webinar on 29 February. If you haven’t renewed your subscription, there’s still time by clicking here.