Opinion piece written by John Maroney, CEO, SMSF Association
Uncertain economic factors and turbulent sharemarkets as the coronavirus pandemic bites are worrying for anyone who is saving for their retirement – whether they are stopping work soon or still have many years of saving and investing ahead.
It is a particularly a stressful time for Self-Managed Super Fund trustees actively making the investment decisions for their fund. The financial risk of having enough capital accrued to fund their retirement lies squarely with them.
Contributions are made and invested on behalf of the SMSF members. Those, along with net investment returns, determine how much is available to fund members in retirement.
Although trustees have no control over financial markets, they do exercise power over their levels of contributions to superannuation, within certain rules.
Catch-up concessional contribution rules are a relatively new opportunity that can be used to maximise tax-effective contributions.
As these contributions have tax advantages, eligibility rules are specific and strict.
The principal idea of catch-up concessional contributions is to acknowledge that not all members contributing to super can utilise the maximum tax-deductible concessional contribution cap every year. This cap currently is $25,000 per annum.
Concessional contributions for a member of a fund include:
- Compulsory Superannuation Guarantee contributions made for the member by their employer;
- Salary sacrifice contributions organised in advance with an employer, to make on a member’s behalf, to super as part of a salary package agreement;
- Contributions that a member has made to super for which they are eligible to claim a personal tax deduction.
The first feature of catch-up concessional contributions is that any unused concessional contribution cap amount accruing from July 1, 2018 – the introductory date for these new rules – can be carried forward for a maximum of five years (on a rolling five-year basis) and contributed as a concessional contribution.
The full concessional cap of $25,000 for the year of contribution must be exhausted first.
The next requirement is that only members whose Total Superannuation Balance (TSB) at the beginning of the year in which the catch-up contribution is to be made is less than $500,000 are eligible to make such as contribution.
TSB is comprised of all the fund’s assets, including pensions and retirement savings accounts.
In this example of catch-up concessional contributions, Mary’s employer made compulsory Super Guarantee contributions of $10,000 to her SMSF in the financial year 2018-19.
The unused cap amount for this financial year is therefore $15,000.
If, in 2019-20, Mary wished to make an additional contribution herself personally of $30,000, in addition to her employer Super Guarantee contribution of $10,000 made that year, and claim a tax deduction for those contributions, then this would be possible.
The breakdown would be the gap up to her concessional contribution cap for the 2019-20 of $15,000, plus the catch-up contribution of $15,000 accrued from the 2018-19 financial year.
This potential gap can come about from many real-life circumstances.
For example, where someone has had either a voluntary or enforced break from the workforce – such as being made redundant or being stood down during the current coronavirus crisis – then any unused concessional contribution cap, up to the maximum $25,000, can be carried forward for up to five years.
Spouses leaving the workforce to look after young children or self-employed who work as an individual taxpayer rather than as an employee and elect not to contribute to super are also examples of how this under-utilised concessional contribution cap can be used.