Tax benefits for unused “carry forward” concessional superannuation contributions
• Super,
From 1 July 2019, new rules were introduced that allow eligible taxpayers to claim tax deductions for the unused portion of their super concessional contributions caps from prior years. This brings tax deductions into the current financial year that would have otherwise been in excess of the ordinary annual concessional contribution cap.
The fundamentals behind the “carry forward” unused cap rules are outlined here.
Outline of rules
A concessional contribution is defined as a contribution to a super fund before tax. This type of contribution is taxed at a flat rate of 15% in the fund.
Concessional contributions can come from several sources: from a person’s employer, from pre-tax salary sacrificed contributions the person has elected to make through their employer, and from contributions they have made personally where they claim a tax deduction for those contributions. The combined total of the contributions from each of these sources counts towards the person’s concessional contribution cap.
The 2022 financial year concessional contribution cap is $27,500, an increase from the previous financial year’s $25,000.
The new rules give people the capacity to look back on each financial year commencing from 1 July 2018 to calculate the “unused” portion of their concessional contributions cap in each financial year. Once this is calculated, the individual can “carry forward” and, when desired, “catch up” and claim the unused portion of their concessional contributions caps in a later financial year. Claiming the unused portion of concessional contributions caps in a later financial year can achieve a better tax outcome for that financial year, and maximise the amount the person is able to contribute to their super.
The “unused” cap is effectively the difference between the concessional contribution cap for the financial year less the total of all before tax contributions made in that same financial year.
A person can only claim unused super contributions from previous years if their total super balance is less than $500,000 at 30 June in the financial year before the year in which they make their catch-up contributions. For example, if a person’s total super balance is $450,000 at 30 June 2021, they can make catch-up contributions for their unused cap in the 2022 financial year. If their total super balance at 30 June 2021 is $550,000, they are not eligible to claim unused super contributions from previous years.
Unused concessional cap amounts can only be carried forward for a maximum of five years. After five years, the unused amounts expire.
What are the benefits of catch-up contributions?
Making a catch-up contribution is an easy way to boost a super balance at a time when a person has the financial resources to do so, while offering significant tax benefits.
The rules give greater flexibility in making contributions to a range of taxpayers, at a time that suits their personal circumstances. For example:
- Work patterns and income may fluctuate from year to year. A tax deduction for super contributions may not be required in a low income year, but may be the following financial year if income is significantly higher.
- Restricted cash flow may prevent making super contributions. As cash flow improves, catch-up contributions can be made.
- Usual income may mean there is little to no tax advantage in making super contributions, but the sale of a large capital asset, such as shares or rental property, could result in a significant capital gain. In this instance, a catch up contribution made by harnessing unused caps from previous years would reduce taxable income in the year of the sale.
Beware complexity
Concessional superannuation contributions can be complex, and implementing the right strategies is vital to ensure people maximise their superannuation savings.
Case study
In the 2019 financial year, Virginia was employed on a full-time basis. The superannuation contributions from her employer and her salary sacrificed pre-tax contributions totalled $25,000. In that financial year, Virginia maximised her concessional contributions cap and has no “unused cap” to carry forward.
During the 2020 financial year, Virginia lost her job due to the impacts of COVID-19. Her employer had made $8,000 in super guarantee contributions during that financial year. Virginia was concerned about her short-term employment prospects and chose to make no personal super contributions in that year. At the end of the 2020 financial year, Virginia had an unused cap amount of $17,000 – the annual concessional contributions cap of $25,000, minus the $8,000 employer super guarantee contributions.
Virginia remained unemployed throughout the 2021 financial year and made no personal contributions. Her concessional contributions cap for that year was again $25,000, with the total amount counting towards her unused cap. Virginia’s total unused cap of $42,000 across the 2020 and 2021 financial years carries forward to the 2022 financial year: $17,000 from the 2020 financial year plus $25,000 from the 2021 financial year.
During the 2022 financial year, Virginia finds employment and her employer pays $16,000 in super guarantee contributions to her fund.
Virginia’s total super balance at 30 June 2021 is $468,000. Because this is under the $500,000 threshold, she is eligible to utilise all of the unused cap of $42,000 from the previous two financial years.
In addition, Virginia has a 2022 financial year cap of $11,500 remaining, which is the 2022 cap limit of $27,500 minus the $16,000 employer super guarantee contributions made by her employer.
Virginia can therefore choose to make a total concessional contribution of $53,500 in the 2022 financial year, which provides an immediate tax benefit by reducing her taxable income and allowing her to boost her super balance.
After contributing the $53,500, Virginia has no unused cap to carry forward to the 2023 financial year, but will continue to accumulate cap space in future years if she chooses not to maximise her concessional cap.
It is unlikely she will use her unused cap space again in future years, given that her total super balance at 30 June 2022 may exceed the $500,000 threshold once contributions are made during the 2022 financial year.
The following table shows Virginia’s use of the carry forward rules for concessional super contributions across the 2019 to 2022 financial years.
| Financial year | Concessional contributions made in year | Concessional contributions cap for year | Unused concessional cap for year | Cumulative unused cap to carry forward |
| 2019 | $25,000 | $25,000 | $0 | $0 |
| 2020 | $8,000 | $25,000 | $17,000 | $17,000 |
| 2021 | $0 | $25,000 | $25,000 | $42,000 |
| 2022 | $69,500* | $27,500 | $0 | $0 |
| Total | $102,500 | $102,500 | $42,000 | N/A |
*The $69,500 in contributions made during the 2022 financial year are the combination of Virginia’s employer’s super guarantee contribution of $16,000, plus the concessional cap in 2022 of $11,500, plus her full cumulative unused carry forward cap of $42,000.