Tax Saving Strategies- Carry-Forward Concessional Contributions

Utilizing underutilized superannuation contribution strategies, such as carry-forward concessional contributions, remains an unfamiliar approach for many. However, the potential tax-saving benefits are significant, often amounting to tens of thousands of dollars.

What Are Concessional Contributions?

Concessional contributions refer to payments made to your superannuation fund before tax is deducted. These are the three main types of contributions: employer contributions, salary-sacrifice contributions, and personal tax-deductible contributions. These contributions are subject to a yearly limit, any excess contributions will be subject to additional tax. 

Ok, here’s the good news, if you have the unused balance in your account for the previous year, you might be able to carry it forward and use it in the years to come.

What Are Carry-Forward Concessional Contributions?

The carry-forward of your concessional contributions refers to portions of your concessional contribution cap that were not utilized in the preceding financial years but can be utilized in the current financial year. People also know this as catch-up concessional contributions which enables them to make up for missed deductible contributions to their superannuation.

Rules Governing Carry-Forward Concessional Contributions

The carry-forward rule enables individuals to roll over unused portions of their concessional contribution cap for up to five financial years, starting from the 2018/19 financial year.

Benefits of Utilizing Carry-Forward Concessional Contributions

Utilizing carry-forward concessional contributions offers several advantages, such as:

1. Contributions made to superannuation through salary sacrifice or personal concessional contributions decrease your taxable income, similarly, typically resulting in lower personal income taxes.
2. You bolster your retirement savings and the amount invested in the tax-efficient superannuation environment, where super earnings are taxed at a maximum of 15%.
3. Carry-forward concessional contributions can mitigate capital gains tax (CGT) in a year when you sell an investment held personally.
4. You can implement a transition-to-retirement strategy.

Risks Associated with Utilizing Carry-Forward Concessional Contributions

Despite the benefits, it’s important to be aware of the risks and drawbacks, including:

1. All concessional contributions are subject to a contributions tax of 15% (or 30% for very high-income earners).
2. If the contributions tax exceeds your tax rate, a non-concessional contribution might be more suitable than a concessional one.
3. Contributions made to superannuation are inaccessible until you meet a superannuation condition of release, such as retirement or reaching age 65.
4. Contributions made to super are typically invested and therefore subject to market fluctuations and volatility.
5. Exceeding the concessional contribution cap could lead to excess contributions tax.

 Key Considerations and Steps for Optimizing Carry-Forward Concessional Contributions

To effectively harness the benefits of this tax-saving tactic, it’s essential to delve into the crucial steps and considerations:

1.     Types of Contributions: Carry-forward concessional contributions can be initiated through various channels, including employer contributions, salary-sacrifice contributions, and personal tax-deductible contributions.
2.     Age Requirements: Standard age criteria for concessional contributions remain relevant. while under age 75, there is no restriction on utilizing unused carry-forward contribution amounts. However, if you are aged between 67 and 75, you will need to satisfy the superannuation work test (or work test exemption) to make a personal concessional contribution.
3.     Unused Cap Amounts: The quantity of unused cap amounts you can carry forward is contingent upon your contributions in preceding years, beginning from 2018–19. The oldest untapped cap amounts take precedence, with a shelf life of up to 5 years before expiration.
4.     Automatic Application: Unused concessional cap amounts are automatically applied once you surpass the cap in any given year.
5.     Excess Contributions: Exercise caution to avoid exceeding concessional contribution limits, as doing so may necessitate payment of additional taxes.
6.     Division 293 Tax: Note that Division 293 tax applies to these contributions. This entails an additional 15% tax on concessional contributions if your annual income exceeds $250,000.
7.     Deadline: Contributions must be received by your superannuation fund no later than June 30th to count towards the financial year.

Should You Utilize Carry-Forward Unused Concessional Contributions?

Only consider utilizing carry-forward unused concessional contributions if the additional superannuation contributions you intend to make will reduce your overall tax burden more than the tax you would incur without contributing. However, while tax reduction may be a quantifiable reason for utilizing the carry-forward rule, other factors such as accessibility, investment timelines, and cash flow management should also be taken into account when determining the appropriate contribution amount.

While it’s feasible to implement a contribution strategy that leverages unused contributions without professional advice, it’s crucial to recognize that mistakes made in this process can have irreversible consequences. Avoid potential headaches and frustration by seeking guidance from a qualified financial advisor regarding this strategy.

 Conclusion:

Sometimes the world of superannuation contributions may seem to be a complicated one, but with the right knowledge and strategies you can find the best way to save for your retirement and have a better life in your senior years. In this article, we have considered the advantages and drawbacks of personal and concessional super contributions as well as the tax savings that may be incurred by utilizing carry-forward concessional contributions. 

By learning about how super contributions work on a personal level and the tax implications involved, you can make the decisions that match your financial goals and are right for you. Whether you want to increase your retirement savings, minimize your taxable income, or access tax-efficient investment opportunities, contributions to your personal and concessional superannuation accounts can be valuable ways of accomplishing these goals. 

In addition, the proposal of carry-forward concessional contributions as a tool for maximizing super savings and reducing tax liability provides individuals with an additional tool. While this approach might bring some benefits, you should be careful about it and get professional consultation to make sure it fits within your financial plan. 

To conclude, by tapping into personal and concessional super contributions, combined with a well-thought-out plan and professional advice, you can build a solid foundation for a life of no financial worries after retirement. Bear in mind the fact that informed decision-making and active management of your retirement savings is a must. To make your financial plan better, you may want to seek good advice from the best tax accountants in Perth.

 If you have any questions about maximizing your financial well-being, please feel free to contact one of our Tax Advisor / Tax Agent / Tax Accountant at 0893860047. Let’s shape your success together!