Are you eager to make the most of your superannuation and save on taxes? Tapping into an unused concessional contributions cap could be a savvy way for you to unlock tax savings!
In this article, we will help break down what concessional contributions are, who can benefit from them, and how you can harness them as an opportunity to trim your tax bill.
What Are Concessional Contributions?
Concessional contributions are contributions made to your superannuation fund before tax is taken out. They include employer contributions, salary-sacrifice contributions, and personal tax-deductible contributions. These contributions are subject to a yearly cap, and any amount contributed above this threshold may incur additional tax.
Now, here’s the good news! If you have unused concessional cap amounts from previous years, you may be able to carry them forward and use them in later years. You’ll be eligible to do this if you:
- Have a Total Super Balance of less than $500,000 at the end of the previous financial year (i.e. before June 30th); and
- Have unused concessional contributions cap amounts from up to five previous years (but not before 2018–19).
Benefits of Carry-Forward Concessional Contributions
There are several reasons why you may consider using carry-forward concessional contributions, but the most common reason is a lower taxable income. Increasing the amount contributed to super as a salary sacrifice or personal concessional contribution will lower your taxable income by an equivalent amount. This can be particularly useful if you have a spike in your income one year that pushes you into a high tax bracket.
Consider this example… If your Total Super Balance was under $500,000 at the end of the previous financial year, and you hadn’t made any concessional contributions between 2019 and 2022, you would have a total concessional contribution cap of $130,000 in the 2023 financial year.
Now, let’s say you experienced a significant increase in income, such as a large capital gain, which would have pushed your total taxable income for the 2023 year to $220,000. By using your $130,000 concessional contribution cap, you could potentially save approximately $33,050 in tax.
If you’ve had a sudden increase in income, like a large capital gain, and your super balance is low, it’s well worth exploring whether you meet the criteria to claim additional tax-deductible contributions for that year.
Key Considerations and Steps
To make the most of this tax-saving strategy, let’s delve into the essential steps and considerations:
- Types of Contributions — Carry-forward concessional contributions can be made via employer contributions, salary-sacrifice contributions, and personal tax-deductible contributions.
- Age Requirements — The usual age requirements for concessional contributions still apply. You can contribute concessional funds up to the age of 67. From 67 to 74, you can continue making employer and salary-sacrificed contributions without needing to meet the work test (which typically involves working 40 hours in a 30-day period during the financial year). For personal tax-deductible contributions between 67 and 74, you must meet the work test.
- Unused Cap Amounts: The number of unused cap amounts you can carry forward depends on your contributions in previous years, starting from 2018–19. The oldest untapped cap amounts will be used first, and they remain accessible for up to 5 years before expiring.
- Automatic Application: Unused concessional cap amounts are applied automatically once you surpass the cap in any given year.
- Excess Contributions: Be cautious about making excess concessional contributions, as you may need to pay extra taxes if you exceed the cap.
- Division 293 Tax: Keep in mind that Division 293 tax is applicable to these contributions. This is an extra 15% tax on concessional contributions if you earn more than $250,000 a year.
- Deadline: Contributions must be received by your superannuation fund by June 30th to count towards the financial year.
How can we help?
Carry-forward concessional contributions offer a fantastic opportunity to optimise your superannuation and reduce your tax liability. If you believe you meet the criteria to claim extra tax-deductible contributions, don’t hesitate to reach out to Hoffman Kelly. Our expert team is here to answer your questions and guide you through the process of maximising your superannuation benefits. Contact us today!