The ‘Concessional Catch-up Rule’ (catch-up rule) was introduced by the government a couple of years ago and provides individuals with superannuation balances less than $500,000 greater flexibility when making concessional contributions. From 1 July 2018, individuals have been able to accumulate unused concessional caps and utilise the difference in future financial years.

Concessional contributions are a valuable retirement planning tool that can enable Australian’s to build a retirement nest egg whilst also receiving valuable tax concessions in the process.

Why make concessional contributions?

Concessional contributions are a great way to reduce tax, as these contributions are those which are either sourced from pre-tax monies (before tax is paid at your marginal tax rate (MTR)), or voluntary contributions for which you intend to make a tax deduction claim. In both situations, the result is that rather than being taxed at your MTR, which could be up to 47% including Medicare levy, you are instead taxed at either 15% or 30% for high income earners. This means that so long as your MTR is lower than the applicable superannuation tax rate, there is a tax benefit to be had.

The introduction of the catch-up rule is great news for those with low superannuation balances with plans to boost their savings in preparation for retirement. However, there is also room for creativity in its use, where strategies can be devised to assist in the minimisation of large tax bills in future years.

In order to be eligible to utilise the Concessional Catch-up Rule, you must satisfy the following criteria

  • Be eligible to make concessional contributions: it is a requirement that you be eligible to contribute to superannuation in order to utilize this rule.
  • Have a Total Super Balance (TSB) of less than $500,000 at the end of the preceding financial year: in order to be eligible, you must have a TSB less than $500,000 as of 30 June of the previous financial year. Your TSB is the total sum of all funds held within the superannuation environment and includes those held in accumulation, pension, defined benefit and those funds in transit due to a rollover between funds.
  • Have unused concessional caps from the past 5 financial years: it is unlikely for anyone to meet this criterion at this moment, as due to the recent nature of this legislation you have only been able to accumulate unused caps from 1 July 2018 onwards. This means that at the time of writing, only 2 financial years are readily available to be brought forward.

The following table illustrates how the accumulation of unused caps can play out going into the future:

Comparison Table

Tax planning strategies utilising the catch-up rule

The introduction of the carry forward rule has opened the doors to some creative tax planning strategies, as eligible individuals can take advantage of unused concessional caps to reduce tax payable. We can see this being exceptionally valuable going forward for those with an investment property, business asset sale or share portfolio with a large unrealised capital gain tax (CGT) liability. Essentially, if an investor knows that they will generate a large capital gain and consequently incur a large tax bill, the catch-up rule could be used to their advantage.

If you would like to discuss how this could be applicable to you or if you are interested in discussing your broader financial goals & objectives, please contact one of our advisers for a no obligation discussion.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.