‘Extremely versatile’: Carry-forward concessions a key strategy heading into end of financial year

Speaking on a recent BT technical podcast, technical consultant Matt Manning said that the main theme for super contributions in the 2020–21 financial year has been hesitancy.  

“First, there is the overall COVID-induced economic uncertainty which has resulted in some clients no longer having the funds available to make voluntary contributions to super, and others who do still have the means but are no longer as willing to lock away funds long-term in the tax structure of super,” he said.

“There is also uncertainty as to the contribution rules for those aged 65 and 66. Although it is certain that they can make voluntary concessional and non-concessional contributions without having to satisfy the work test or work test exemption, under current law, they can only trigger the non-concessional bring forward during 2020–21 if they were under age 65 as at 1 July 2020, as the bill to raise this to under age 67 as at 1 July 2020 still has not passed through Parliament.”

It is also important to note the $25,000 concessional cap for this financial year will increase to $27,500 for the 2021–22 financial year and likewise the current $100,000 standard non-concessional cap for 2020–21 will become $110,000 for 2021–22.

Mr Manning said that there always remains a remote possibility that the federal government may use the upcoming budget to propose legislation which would reset or freeze the indexation of these caps.

“Hopefully, they won’t do so, but there is precedent for this occurring,” he said.

“But on the positive front, compared to last financial year, I’ve noticed far greater interest in carry-forward concessional contributions (which were previously known as catch-up concessional contributions). This is likely because during 2020–21, those eligible can now carry forward the unused concessional cap amount for both the 2018–19 and 2019–20 financial years.”

For clients who are eligible and have the means and inclination to do so, Mr Manning noted this is “an extremely versatile strategy and one of the main ones for advisers to consider when approaching the end of the financial year”. 

“Firstly, we have the main policy target of this provision which are clients who have unused concessional cap amounts because they have returned to the paid workforce after an absence for various reasons such raising a family or providing care for a relative,” Mr Manning said.

“It also suits various other situations including those who previously were not aware of the benefit of voluntary concessional contributions until they sought financial advice, those who have had a spike in their taxable income including those who have realised a large capital gain, and also recent migrants and returned expats who have not recently made concessional contributions to super in Australia.

“Also the opportunity to use carry-forward concessional contributions is only going to increase over time as we can utilise the unused concessional cap amount for up to five previous financial years, but we have only been able to accrue unused amounts since the 2018–19 financial year. So, for the current 2020–21 financial year, we can carry forward the unused amount for the previous two financial years, but during the 2021–22 financial year, we can carry forward the used amount for the previous three financial years et cetera.”

This can also create a tax-effective way to save for retirement, but the key will be fulfilling the eligibility criteria for a client to make carry-forward concessional contributions, according to Mr Manning.

Aside from the normal contributions standards such as being under age 67, or age 67 to under age 75, and satisfying the work test or work test exemption, he noted in order to be eligible to utilise carry-forward concessional contributions, the client’s total superannuation balance must be less than $500,000 as at 30 June of the previous financial year.

When looking to use during the 2020–21 financial year, this would mean there is a need to ensure that their total super balance as at 30 June 2020 was less than $500,000.

“Carry-forward concessional contributions can be made via either salary sacrifice or personal contributions claimed as a tax deduction or a combination of the two,” he said.

“From the client perspective, there is no actual election to make aside from the usual s290 process and timeframes if making personal contributions and claiming a tax deduction.

“So long as they are eligible, the ATO will automatically first apply their 2020–21 concessional contribution against their $25,000 concessional cap for 2020–21, and once this is fully used, then apply to any unused amount during 2018–19, and then if this is fully used, apply to any unused amount for 2019–20.

“So, the current-year concessional cap is always the first port of call, then once this is used, the carry forward applies on a first-accrued, first-used basis.”