The concessional contribution cap, our limit for concessionally taxed employer and personal deductible contributions, has remained at $25,000 since superannuation reforms kicked in from 1 July 2017. It is subject to indexation, based on Average Weekly Ordinary Times Earnings (AWOTE), resulting in increments of $2,500 and (fingers crossed) all indicators lead to a change from 1 July next year.
Restricting limits on the contributions that can be made to super can make it difficult for people who take time out from the workforce or work part time over a period to be able to save for retirement. Common examples of where individuals are taking time out of the workforce are to care for young children or other family members; and other situations of extended illness or for furthering training and education.
In these circumstances, these individuals may not be making any contributions or very little will be contributed over their absentee time period. When they return to employment or their situation changes, they may be in a position where they would like to try and catch up financially on the contributions they missed, and they may have funds available to make a larger contribution than normally allowable under the ordinary concessional contributions cap.
Similarly, some individuals may encounter financial windfalls, such as gains on personal investments, where they have the capacity to contribute extra funds or would like to look at ways of reducing their taxable income for an irregular income year.
What is the carry forward concessional contributions cap measure?
From 1 July 2018 the ability to carry forward the unused portion of prior year concessional contributions cap was introduced to help deal with the issues created by individuals changing their working habits and to maximise the use of unused caps for those with lower superannuation balances.
The rules state that where your Total Superannuation Balance is less than $500,000 as at 30th June of the previous financial year, you may be able to use this measure. This enables you to contribute more than the general concessional contributions cap by carrying forward the unused contributions cap from prior years. Unused concessional contributions are available on a rolling basis and can carried forward for a maximum of 5 years after which time they will drop off.
As the change started from 1 July 2018, it means that 2019/20 was the first financial year this unused cap space could actually be used. Many members may not be aware of this change so we will look into what this means for individuals who may be in a position to utilise the cap space and make a catch-up concessional contribution to super.
How does the five year carry forward work in practice?
As mentioned previously, the cap is indexed, however, we will assume that indexation is not relevant in the example below. When it does occur it will just provide a great available amount.
Example
Facts
- Member is 35 years old and takes time out from the workforce from 1 July 2018 to care for two young children.
- Returns to work in a part-time capacity from 1 July 2020.
- In August 2021, sells some personally held shares with a capital gain and wants to make use of some of the unused caps to boost their super given they missed out on contributing whilst they were not working and also offset the tax on the sale of the shares
How does the carry forward arrangement apply to the caps in this example over a 5-year period?
From the above example, we can see that they were under the $500,000 total superannuation balance limit at 30 June 2021 and therefore eligible to carry forward their unused cap to make a larger contribution. As the balance is over $500,000 at 30 June 2023 the measure is not available in the 23/24 year but that doesn’t reset the start of the 5-year period, it just means it is unavailable at that point in time. As the balance drops again in the following year, the measure would be available in 2024/25.
The unused cap space is used in order of earliest financial year to most recent financial year. Therefore, from the above example the unused cap from 2018/19 will expire at the end of the 2023/24, as only $20,000 of the $25,000 cap was used in 2021/22, the $5,000 unused balance will expire. The unused cap space from 2019/20 will expire on 2024/25 if not used.
Conclusion
Maximising opportunities for contributions are essential for individuals who take time out from the work force for various reasons. In order to not be financially disadvantaged for retirement income purposes, any opportunity should be considered where possible. The ability to carry forward unused caps over a rolling 5-year period is one way that people can stay on target when they have additional funds available. Of course, there is the additional bonus that any extra contribution can also be used to offset personal tax liability.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
