If you are between 20 and 45, your retirement may seem like a remote event – but you need to understand the new super rules as much as anyone.
Superannuation is most likely what you will be living on in retirement, so it is imperative to understand how you can maximise it while you’re working.
One of new super rules announced in last year’s budget is the ability to carry forward unused concessional contributions cap space. It will come into effect from the 1st of July 2018. That may seem a long way off, but the time to think about this is now.
Concessional contributions cap space
The ability to carry forward unused concessional contributions cap space will be only available for members with a total superannuation balance of less than $500K (measured at the end of the previous financial year).
The easiest way to see how this is going to work is to consider an example:
Susan is a 40-year-old professional with a salary package of $110,000 plus superannuation. Her employer must pay 9.5% of super guarantee into Susan’s preferred superannuation fund, amounting to $10,450 annually.
Susan has also an option to contribute an additional $14,550 annually into the fund to reach a total of $25,000 per year.
From 1st of July 2017, Susan will be able to claim a tax deduction for any personal contributions made into the superannuation system, which is within the limit of the concessional contributions cap (currently $25,000 per year).
However, let’s assume that Susan only had her guaranteed superannuation contributions of $10,450 paid in by her employer.
From 1st of July 2018, when an individual makes less than $25,000 of concessional contributions and their total superannuation balance is under $500,000, the difference between the concessional contribution cap (currently is $25,000) and the contribution is the “unused cap space”.
Therefore, with the new super rules, Susan will have $14,550 of unused contributions space in 2018.
And, in 2019, Susan can contribute into her super fund and claim a tax deduction for the amount of $39,550, which consists of:
$25,000 – contributions cap for 2019
$14,550 – unused contributions space in 2018
Let’s assume that Susan was on the same salary with the same employer for five years, with only the employer contributions to super.
Every year, beginning from 2018/2019, Susan will have an unused concessional contributions cap space of $14,550 carried forward.
By the end of year five, Susan would accumulate the amount of $72,750 of unused contributions space. In year six, Susan will be able to contribute the amount up to $97,750 and claim a tax deduction for it:
$25,000 – concessional contributions cap for year 2023/2024
$72,750 of unused contributions space accumulated in the last 5 years
If Susan contributes less than the $97,750, the unused cap for the earliest year will apply first.
So, in this example, the unused cap space of $14,550 from 2018/2019 will be applied first, then the unused cap from 2019/2020 and so forth.
After five years, the unused contributions cap space will expire. So, if Susan contributes less than $25,000 in the sixth year, which is her annual contributions cap, her unused contribution cap space for 2018/2019 will no longer be available.
Please note that concessional contributions are taxed at the concessional rate of 15 percent.
Who can benefit from the new super rules?
The new super rule about contributions cap space could be useful for business owners and employees with a patchy income pattern; it might also be useful for women who were on maternity leave and who are coming back into the workforce and want to catch up with their contributions.
The strategy could also be used by investors in the year where they sold an asset and realised a capital gain. To minimise capital gain tax, an investor could make a contribution into their super fund, utilising the unused concessional contributions cap space and pay only 15 percent tax on it. This could potentially save thousands of dollars in tax.
If you would like to know more how the new super rules will affect you and what strategies you can use to maximise your super, please give Natalia a call on 0432 366 690 or email us on enquiry@smsfconsulting.com.au.