Carry-forward brings opportunities for younger trustees
The government’s recently introduced catch-up concessional contributions may be more suited to young professionals in the pre-family stage rather than women reentering the workforce after caring for young children, according to a leading SMSF administrator.
Heffron SMSF Solutions managing director Meg Heffron told SMSF Adviser the catch-up contribution policy, which was able to be used by members for the first time this financial year, had been introduced to address super shortfalls in women returning from maternity leave but may be better used by those in their 20s, 30s or 40s without children.
“I’ve been educating people on this law for two years and I realised we’ve been thinking of it as for mothers who are absent in the workforce for a time and can catch up on their concessional contributions, but in reality, how often does that happen?” Ms Heffron said.
“If you’re a mother out of the workforce having maternity leave and you return to work, nobody comes back with loads of cash they can dump into super.”
Ms Heffron said given professional couples often reached a peak in their discretionary income just prior to having children, it was useful for SMSF advisers with clients in this age group to think about contribution strategies to maximise super during this life stage.
“It’s the bright young professional man or woman who is earning, not making maximum use of their concessional cap and they get to a point where they get a bonus or a salary increase and for the first time they have more than they need to pay off their uni debt or fund their exciting lifestyle,” she said.
The expansion in deductions for personal contributions had also made this strategy attractive for this age group, as they were often looking for deductions to reduce their income at tax time.
“In the past, you had to make the decision to contribute [to super] in advance and tell the payroll department to salary sacrifice it, but now the client can take that in cash and decide in June that they are going to put it into super and claim a deduction,” Ms Heffron said.
In a paper presented at Class Connect’s 2019 conference in Sydney on Tuesday, Ms Heffron further illustrated this strategy with the example of Jane, who earned $150,000 and received $14,000 of SG contributions in the 2019 financial year, followed by a $20,000 bonus in August 2019.
By taking the bonus in cash then contributing the whole amount as a deductible personal contribution, Jane is able to utilise catch-up contributions by bringing forward an $11,000 amount in unused contributions and adding this to her $25,000 concessional cap for 2020.
“This will be taxed at 15 per cent by the receiving fund, i.e. $3,000 compared to $7,400 plus Medicare, if she had not made the tax deductible contribution,” the paper stated.
“She has used the carry-forward rules here to maximise the contribution she can make with this additional bonus payment. Without those rules, she would have been limited to a $9,000 personal deductible contribution and hence a smaller tax saving.”
