Super opportunity: Catch-up concessional contributions from July 2018

From 1 July 2018, if your Total Superannuation Balance (includes all balances, if you have more than one super account) is less than $500,000 at the end of a financial year, then you will have the opportunity to start accumulating the unused portions of your concessional caps from previous years (up to 5 years’ worth) in the following financial year, or future years.

Important: The unused cap amounts can start to be carried forward from 1 July 2018, that is, from the start of the 2018/2019 financial year, which means the 2019/2020 year is the first financial year that individuals can take advantage of unused cap amounts from previous financial years.

At the risk of repeating information, the key messages you can take from the new catch-up concessional contributions rules are as follows:

• Since 1 July 2017: The annual concessional contributions cap has dropped to $25,000. For detailed information on how the annual cap works, see SuperGuide articles Super concessional (before-tax) contributions: 2018/2019 survival guide and Cut to concessional contributions caps: the back story.
• From 1 July 2018: An individual can start to carry forward unused concessional cap amounts.
• From 1 July 2019: An individual can play catch-up concessional contributions (using unused portions of the annual concessional caps from one or more of the previous 5 years), provided the individual has a Total Superannuation Balance of less than $500,000 in super, just before the start of the financial year. Note that an individual can only start carrying forward unused cap amounts FROM 1 JULY 2018.

Note: For background information about the concept ‘Total Superannuation Balance’ see SuperGuide article Total Superannuation Balance: 7 reasons why your TSB matters.

Clearly the inexperienced Liberals don’t remember the ALP attempting to introduce a concessional cap (for over-50s) based on a $500,000 balance, and the expected administration hassles and horrors forced the ALP to scrap the idea. I doubt the $500,000 account balance requirement will be a pleasant experience for fund members to monitor, especially if an individual has multiple super accounts, or has unfunded public sector accounts, or has a combination of pension and accumulation accounts. 

What are concessional contributions?

Quoting directly from the explanatory memorandum accompanying the new legislation, concessional superannuation contributions are “broadly those that are made to a complying superannuation provider by an employer on behalf of an individual or by the individual themselves, which are included in the assessable income of the superannuation provider in relation to the plan and in respect of which the employer or individual claims an income tax deduction”.

Note: For a more precise, and plain English explanation of concessional contributions, see SuperGuide article Super concessional (before-tax) contributions: 2018/2019 survival guide.

The explanatory memorandum also flags that concessional contributions that exceed the annual cap ($25,000 since July 2017) are considered excess contributions. Excess contributions are included in a person’s assessable income for income tax purposes with a tax offset to recognise that 15% contributions tax has already been deducted from the super contributions.

Note: For more information about excess contributions, see SuperGuide article Excess contributions rules: A quick summary.

How will the catch-up concessional contributions provisions work?

According to the explanatory memorandum (Chapter 8), an individual will be able to make concessional contributions in excess of the annual $25,000 cap in a financial year under the following circumstances:

• The individual had a Total Superannuation Balance of less than $500,000 on 30 June of the previous financial year.
• The individual has unused concessional contributions cap amounts from one or more previous financial years. An individual has an unused concessional cap for a financial year if he or she did not fully utilise his or her $25,000 concessional contributions cap for that financial year.
• The unused concessional contributions cap amounts relate to one or more of the previous five financial years, and the earliest unused cap is applied first.

Note: An individual cannot have an unused concessional contributions cap amount before July 2018, for the purposes of the catch-up concessional contributions provisions. What this means is that the 2019/2020 financial year (starts from 1 July 2019) is the first financial year in which you can apply your unused concessional contributions cap amounts.

Remember: Unused concessional contributions cap amounts not utilised after five years can no longer be carried forward; that is, you lose the opportunity to take advantage of the unused portions for those previous years going back further than five years.

For more details of how the new catch-up rule will work, continue reading. For a quick summary of the catch-up concessional contributions rule, see SuperGuide article Concessional contributions: Catch-up rules now apply (10 Q&As).

Why is the government introducing the catch-up provisions?

Chapter 8 of the explanatory memorandum accompanying the new legislation states that the intention of the catch-up concessional contributions provisions are designed to assist Australians with interrupted work patterns or irregular incomes, to accumulate super balances in a similar way to those Australians who do not take breaks from the workforce.

The EM states “The measure ensures that people who have not had the capacity to contribute up to their concessional contributions cap in prior years will be able to make catch-up contributions by targeting it to those individuals who have been unable to accumulate large superannuation balances.”

Accordingly, Schedule 6 of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill Act 2016 enables catch-up concessional contributions for “individuals with a total superannuation balance of less than $500,000 just before the start of the financial year to make additional concessional contributions in that financial year by accessing unused concessional contributions cap amounts carried forward the previous five [financial] years. Unused cap amounts can be carried forward from the 2018-19 financial year”.

For more information on the concessional contributions rules, see SuperGuide article Super concessional (before-tax) contributions: 2018/2019 survival guide.

How do you work out your unused concessional contributions cap?

The explanatory memorandum provides some examples of how the unused concessional contributions cap amount is calculated. We have adapted and repackaged the examples to provide a revised summary example, and more comprehensive tables, as set out below.

Example: Calculating unused concessional contributions cap amounts

During the 2018/2019 financial year, Miranda’s employer made Superannuation Guarantee contributions of $10,000 to Miranda’s super account. Miranda made no personal concessional contributions. Miranda’s unused cap amount is $15,000 ($25,000 less $10,000).

From the 2018/2019 financial year through to the end of the 2022/2023 financial year, Miranda’s employer continued to contribute $10,000 a year (ignoring the fact that the SG rate increases to 10% from July 2021, and to 10.5% from July 2022), and does not make any personal concessional contributions for those years. Her unused concessional contributions cap amount is $15,000 for each year (see table below).

On 30 June 2023, Miranda had a Total Superannuation Balance of less than $500,000. During the 2023/2024 financial year, Miranda makes a deductible personal contribution of $30,000, in addition to her employer’s $10,000 Superannuation Guarantee contributions (again ignoring the fact that the SG rate increases to 10% from July 2021, and to 10.5% from July 2022, and to 11% from 1 July 2023). We also assume the annual concessional contributions cap has not increased from $25,000 over the timeframe.

Miranda’s concessional contributions for the 2023/2024 year are $40,000, which exceeds the annual $25,000 concessional cap by $15,000. She can now use the $15,000 of unused concessional contributions cap amount from the 2018/2019 financial year (see table below).

On 30 June 2024, Miranda had a total superannuation balance of less than $500,000. For the 2024/2025 year, Miranda makes a $20,000 deductible personal contribution in addition to her employer’s $10,000 SG contribution (again ignoring the fact that the SG rate increases to 10% from July 2021, and to 10.5% from July 2022, and to 11% from 1 July 2023, and to 11.5% from July 2024). We also assume the annual concessional contributions cap has not increased from $25,000 over the timeframe.

Miranda’s concessional contributions for the 2024/2025 year are $30,000, which exceeds the annual $25,000 concessional cap by $5,000. She can use $5,000 from the $15,000 of unused concessional contributions cap from the 2019/2020 financial year (see table below). The remaining $10,000 of the unused concessional cap from the 2019/2020 cannot be used in future years, as it will be outside the five-year carry forward period.

How do the unused concessional contributions cap rules operate?

	2018/ 2019	2019/ 2020	2020/ 2021	2021/ 2022	2022/ 2023	2023/ 2024	2024/ 2025
Annual concessional cap	$25,000	$25,000	$25,000	$25,000	$25,000	$25,000	$25,000
Concessional contributions	$10,000	$10,000	$10,000	$10,000	$10,000	$40,000	$30,000
Unused concessional cap	$15,000	$15,000	$15,000	$15,000	$15,000	$0	$0
Accumulated unused cap	$15,000	$30,000	$45,000	$60,000	$75,000	$60,000	$55,000

How will the $500,000 Total Superannuation Balance threshold be measured?

The measurement of the ‘Total Superannuation Balance’ for each fund member is complicated. We assume you didn’t expect a straightforward answer to the question of what counts for the $500,000 Total Superannuation Balance threshold.

According to the explanatory memorandum accompanying the new legislation, an individual’s Total Superannuation Balance at a particular time includes the following three items:

• The value of all superannuation interests in accumulation phase (that is, all super interests not in retirement phase)
• The balance of a person’s transfer balance account (generally commencement value of a superannuation pension), adjusted to reflect the current value of account-based pension interests in retirement phase (formerly called pension phase)
• ‘In transit’ rolled over superannuation benefits (that are not yet reflected in the balances mentioned in the previous two bullets)

The sum of these amounts is then reduced by the sum of any structured settlement contributions (if applicable), which relate to compensation payments resulting from serious injury and income loss that are rolled over into super.

Warning: Apparently the government is going to hold you responsible for knowing what your total superannuation balance is each year, so I am guessing most readers may require further detail on these three components. Continue reading to discover more information about how your Total Superannuation Balance is calculated (see also SuperGuide article Total Superannuation Balance: 7 reasons why your TSB matters).

1. Accumulation phase value of a superannuation interest

According to the explanatory memorandum (Chapter 5), the default rule for calculating the accumulation phase value of an individual’s superannuation interest at a specific time, is “the total amount of superannuation benefits that would become payable if the individual voluntarily caused the interest to cease at that time. Otherwise the accumulation phase value is the value of the superannuation interest as set out in the Income Tax Assessment Regulations 1997”.

If you have a single interest in a super fund, then this value will be your ‘withdrawal benefit’ amount. If you have more than one interest in a super fund (such as a right to a defined benefit pension on resignation), then only the accumulation account balance is counted towards this first limb of the $500,000 Total Superannuation Balance threshold.

If you have accumulation phase interests in more than one super fund, the combined amount of all of these interests.

2. Retirement phase value, or pension phase value

The second component of the ‘Total Superannuation Balance’ is the retirement phase value (that is, the balance of an individual’s transfer balance account). This component is generally going to be the commencement value of a superannuation pension. The transfer balance account is the net amount of capital an individual has transferred to pension phase, and may be adjusted to reflect the current value of account-based superannuation interests in pension phase.

Not clear enough? Blame Treasurer Scott Morrison for introducing this ridiculously complicated $500,000 Total Superannuation Balance threshold as a means of taking advantage of the catch-up concessional contributions provisions.

Note: The transfer balance account is already required to be calculated by super funds to comply with the $1.6 million transfer balance cap rules (for background on this policy see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap).

3. Rollover superannuation benefit

The third limb of the Total Superannuation Balance definition is any rollover super benefits that a person has arranged to be transferred, and at year-end, does not yet appear in the accumulation phase value or in the balance of the transfer balance account. This is a catch-all limb to ensure that any rollovers at the end of the financial year are included in the calculation.

For more information…

For more information on the catch-up concessional contributions rules, and concessional contributions generally, see the following SuperGuide articles:

• Concessional contributions: Catch-up rules now apply (10 Q&As)
• Super concessional (before-tax) contributions: 2018/2019 survival guide
• Cut to concessional contributions caps: the back story
• Super opportunity: Catch-up concessional contributions from July 2018
• Salary sacrifice and super: A guide for employees and employers
• Employees can now make tax-deductible super contributions (since July 2017)
• Concessional contributions cap: A quick guide (10 Q&As)