How to make up for missed concessional contributions
Concessional contributions are taxed at 15%, making them a valuable way to increase the balance in superannuation accounts and minimise tax.
However, from July 1, 2017, the total amount that members can contribute to their superannuation at the concessional tax rate was reduced to $25,000 per year.
Furthermore, non-concessional (after tax) contributions are capped at $100,000 per year. Any additional contributions would attract a tax of 47%, for which members are personally liable.
They must have their super fund release these funds to pay the tax. This makes it financially unviable to contribute more than the cap.
When these changes were announced, it was expected that they would affect fewer than 4% of super account holders, since so few people can afford to contribute more than $25,000 per year.
However, this overlooks the fact that many Australians are trying to increase their super account balances as they prepare to retire.
People looking to retire in the short- to medium-term may have lower superannuation balances than they need because compulsory super has only been in place since 1992.
This means plenty of people who were working before then had no retirement savings.
It also means these people have been saving for retirement for less than 30 years, so they need to augment these savings if possible.
This has been accounted for to some extent by the "bring forward" rule that lets people under the age of 65 use some of their cap from future years to contribute now.
This depends on how much is already in their superannuation.
For the majority of under-65s, their superannuation balance will be less than $1.4 million, which means they can contribute up to $300,000 immediately. However, they can't contribute any further funds for the next three years.
Members with $1.4 million to $1.5 million can contribute $200,000 immediately, with no further contributions for the next two years, and those with $1.5 million to $1.6 million can contribute up to $100,000 with no further contributions for the next 12 months.
Members with more than $1.6 million cannot contribute.
These rules are important because it's likely that most people won't have excess cash to contribute to superannuation until later in life, when children are grown and mortgages have been paid down.
For many business owners, it is the business itself that is the retirement plan, so the cash available for retirement isn't available until the business is sold.
These changes highlight the need to plan ahead to structure retirement funding so that income is maximised and tax is minimised. There are a few ways people can do this:
1. From July 1, 2019, members will begin to be able to contribute unused concessional contributions from the past as long as their superannuation balance is lower than $500,000 and their taxable income is high enough to allow the deduction. This will initially allow only a single unused year of contributions to be used, increasing each year to eventually allow up to five years' worth of unused contributions to be used.
2. Members aged over 65 who sell their residential home after July 1, 2018 may be able to contribute some of the proceeds to superannuation under the new "downsizer" contribution rules.
3. Those using their business as their retirement plan may be eligible for small business capital gains tax concessions. To do this, it's important to plan well in advance and discuss all the options with a qualified adviser.
4. It's essential for members to keep an eye on their superannuation balance, which can fluctuate according to the market conditions relating to their investments. Knowing where the balance sits can be crucial when it comes to the timing and amount of contributions.
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