Carry Forward your Tax Deductions

An edited version of this article appeared in The West Australian, Your Money, on Monday 19th February 2024.

Making tax deductible, or “concessional” contributions to super can be a significant tax saving strategy, as well as a providing a boost to future retirement income streams.

In years gone by, we were subjected to a “use it or lose it” approach to concessional contributions.  If you did not make contributions up to the cap, or any at all, you missed the opportunity to take advantage of the associated tax benefits altogether.

This all changed with the introduction of what were originally called catch-up contributions when announced in the 2016 Federal budget, and are now known as carry-forward concessional contributions.

These still relatively unknown and often unused rules meant that from 1 July 2018, eligible individuals could accumulate unused concessional contributions and carry these forward and start making use of them from 1 July 2019.

What is a carry forward contribution?

A carry-forward contribution is not a new or special type of contribution.  It is simply a mechanism allowing investors to utilise all or a portion of their unused concessional limits on a rolling basis for up to 5 years.

After 5 years, any portion of your unused contribution cap will expire.

Carry forward contributions, like all concessional contributions, are subject to contributions tax of 15%, or potentially 30% for those with earnings in excess of $250 000 per annum.

Why were carry forward contributions introduced?

Carry forward rules were intended to provide those with irregular incomes, or expenses patterns, the ability to contribute to super to the same level as those with a more linear or predictable financial situation.

For example, self employed people with variable profits, or those working in industries that have bonus or commission structures that provided lumpy or unpredictable incomes.

It was also designed to assist those who take time out of the workforce to raise a family, or have spent time overseas, to have the same opportunity to provide for a comfortable retirement as those with an uninterrupted work history.

It is also a welcome change in rules for people who have changing levels of disposable income later in their working lives once other financial commitments like mortgages or school fees were under control.

How much can I contribute?

Since the 2021/22 financial year, the concessional contribution cap is placed at $27 500 per annum.  Prior to that, the cap was $25 000 per annum.

Your concessional contribution cap is made up of compulsory employer contributions, salary sacrifice contributions, and any personal contributions you make that you have claimed a tax deduction for.

If your Total Super Balance (TSB) is less than $500 000 as at 30 June of the previous financial year (at this point meaning as at 30 June 2023) you may be eligible to make a carry-forward contribution.

Your TSB is made up of the total value of any super funds in accumulation phase and any amounts in pension funds in draw down phase.

If you meet that criteria then you will next need to get an understanding of how much unused cap you have available to you.

In simple terms, the unused cap is the difference between concessional contributions made in a qualifying financial year, and the cap that applied in that corresponding year. For example, if you had concessional contributions of $12 500 made in the 2022/23 financial year, then you could carry forward $15 000 of that unused cap to the next 5 financial years.

Relying on old statements and calculating manually can be unreliable, but your financial advisor can do this research for you, or your accountant through their access to your ATO portal.

Alternatively you can log into your myGov account and access the superannuation contribution history through the ATO service there.

This will let you know how much unused cap you have at your disposal, and also if your Total Super Balance is under the appropriate threshold to make a contribution.

A Practical Application

In this financial year, Samantha will receive employer contributions, and in addition to that, she decides to take advantage of the carry-forward rule and use some of her unused concessional cap amount.  As at 30 June 2023 her Total Super Balance was $400 000, and research into her unused cap amounts have shown she has $70 000 available for potential carry-forward contributions.

Given Samantha has a cap of $27 500 in the 2023/24 financial year at her disposal, she could make up to $97 500 in tax deductible contributions prior to 30 June 2024, including her employer contributions.

Let’s say that Samantha has an income of $120 000 in this financial year.  Her employer will pay the standard superannuation guarantee of 11% into her fund, being $13 200.  This means that in this financial year she has a remaining concessional cap of $14 300.

This, in addition to the unused cap from the previous 5 years, means Samantha could contribute up to $84 300 into super this financial year and claim the tax deduction.

Should she do this, her taxable income would drop to around $36 000, meaning total income tax payable would be around $3402. This is in contrast to the tax payable on her salary of $120 000 which is $31 886.

Of course, she would pay 15% contributions tax on her super contribution, which comes to $12 645. Total income tax payable by not making the contribution is $31 886.

Total taxes on income and super ontributions by using the carry forward rule come to $16 047, for a total saving of $15 839.

This is a very simple example that uses all of the carry forward cap in one year.  Spreading it over multiple years while still staying under the TSB will mean that the deductions are offset against higher tax brackets and could result in even greater tax savings.

Considerations before the end of this financial year

With a little over 4 months of this financial year available, those considering aggressive salary sacrificing to take advantage of tax benefits in this financial year could still contribute up to a third of their salary, subject to the carry-forward caps, before the financial year is out.

Alternatively, those with cash available to make contributions in addition to their remaining salary in this financial year can create a significant tax saving and boost to their retirement capital.

This could be a window of opportunity to offset any capital gains realised in this financial year, or those who simply don’t want to waste expiring unused concessional contributions.

Remember that concessional contributions attract tax of between 15% and 30% depending on earnings, so managing the amounts of contributions to ensure you are not unwittingly paying more tax in super than you would personally is important.

And if you are nearing the $500 000 Total Super Balance and think you may be over the limit next financial year, then acting now to take advantage of any unused contributions and tax savings may be time critical.

What if I’m a GESB West State or Gold State member?

The good news for members of these constitutionally protected funds who are employed by the State Government is that they are not subject to the annual contribution caps.  Instead, they enjoy a lifetime untaxed plan cap that is $1.705m this financial year.  This means they have far more flexibility to take advantage of varying levels of annual contributions, and make contributions greater than the standard concessional caps available to ordinary super fund members.  This is a specialised area that requires the appropriate guidance to navigate.

Get the right guidance

Like most matters superannuation related, the rules and pitfalls can be trickly to navigate.  If you think you are in a position to take advantage of the tax benefits of carry-forward super contributions it is important to seek sound advice to get it right.

Raymond Pecotic is the Managing Director of Empire Financial Group