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BBB Financial Planning take on Catch Up Contributions

I heard this financial year is the last opportunity to make catch up contributions for the 18/19 financial year, what is it about?

Catch-up contributions allow individuals to make additional contributions to their super if they haven’t used the full amount of their concessional contributions cap in previous years.

A few benefits include:
  • Boost your retirement savings
  • Make up for past lost opportunities from previous financial years
  • Reduce your taxable income
  • Claim a tax deduction
  • Invest funds in a concessionally taxed environment

This opportunity was introduced in the 2018-19 financial year, and unused cap amounts can be carried forward for up to five years before they expire. A total super balance must be below $500,000 on prior 30 June to be eligible to use the catch-up contribution. Thus, a catch-up contribution for the 18/19 financial year can only be made before 30 June 2024.

This provision was aimed at those who may have left the workforce (parents and carers) and allow them to build their super.

Fortunately, this catch-up contribution receives the same tax treatment as a personal deductible contribution. A catch-up contribution can be claimed for a tax deduction helping to reduce personal tax while boosting retirement savings. For our clients especially those who have seen their income climb from a lower level to above the $180k threshold and into the highest marginal tax rate, then making a personal contribution to super may even allow you to drop to a lower marginal tax rate. But even if you were to remain in the highest marginal tax rate, you would receive the tax benefit of being taxed at less than 47% for the contribution amount.

Let’s look at an example

Abhi has an annual income of $205k. Her Super balance is $150k. In this financial year her employer is expected to make a contribution of $22,550. In the 18/19 financial year her employer made contributions of $2,276. In that year Abhi was both studying and caring for a family member and Abhi only received the mandated contributions to her Super account. For Abhi to make catch up contributions she must first meet the cap for this year which is $27,500. Thus she will be required to contribute $5,000 before she can add catch up contributions for previous financial years.

In the 18/19 financial year the concessional contribution cap was $25,000 thus Abhi has an available gap of $22,724 for the 18/19 financial year. If Abhi were to make a contribution of $27,724 ($5,000 plus $22,724), then it reduces her assessable taxable income to $177,276 ($205,000 minus $27,724).

The table below shows a side-by-side comparison of two cases: if Abhi were to not make a contribution compared to making a catch-up contribution.

BOOST TO SUPER - 1

By making a contribution to Super, Abhi has $14,912 less in net income but has increased her super balance by $23,565.40.  Had Abhi not made the super contribution, she was expecting net savings of about $50,000 anyhow.  Thus, she is not required to change her spending habits. In this case, she pays a lower level of tax overall and is able to boost her super.

Is a catch-up contribution appropriate for me?

It depends on your situation, if you are not working or on a low tax bracket and you want to boost your super,  a non-concessional contribution may be more tax effective.

If there is a more immediate need for the funds that you might add to Super, then you may want to consider holding off.  Once funds are contributed to Super, they cannot be accessed until you meet a condition of release, that is generally aged 60 and retired from a role or age 65 regardless of your working status.

If the first two cases don’t apply to you then you may be eligible for making catch up contributions for previous financial years if you have the financial position to support this strategy.

How do I know if I have catch-up contributions available?

You can look on myGov if your Super is linked to your account.  Alternatively, you can reach out to your tax accountant or financial adviser to find out what available caps you have for each financial year since 2018/19.

If you have further questions, you are welcome to reach out to the financial planning team at BBB!


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