As we approach 30 June many clients will be wanting to maximise not only the amount they can contribute to superannuation but also the maximum deduction they can claim on their personal contributions. For what it’s worth, there is no maximum amount that can be claimed but there is a maximum amount before the excess contribution rules kick in and ultimately any contribution that triggers an additional personal tax liability is somewhat counterintuitive.
What is important to know is that the maximum that can be contributed for deduction purposes, that is still taxed concessionally, is not the same as the maximum that can be contributed for contribution cap purposes, and not everyone’s cap is the same. Confused? You’re probably not alone. Below we will breakdown the key considerations for maximising concessional contributions.
Not all caps are created equal
The minimum annual concessional contribution cap starts out innocently enough, since 1 July 2021 it has been $27,500. This amount is indexed in increments of $2,500, noting that no increment will occur from 1 July 2023. For those with a total superannuation balance at the previous 30 June of $500,000, or greater, this amount is the maximum that can count towards the concessional cap in any given year prior to the excess contribution rules applying.
Importantly, contributions are counted against an individual’s cap in the year they are allocated to the member. Contributions must be allocated within 28 days following the month in which they are received.
So for 11 out of 12 months, contributions must be allocated within the same financial year as that which they are received. What is the odd month out? We will come back to that…
Carried forward unused concessional contributions
The ability to carry forward the unused portion of prior year concessional contributions cap was made available from 1 July 2019 to help deal with issues such as individuals changing their working habits and to maximise the use of unused caps for those with lower super balances.
Where an individual’s total superannuation balance (TSB) is less than $500,000 as at the previous 30th June, the measure can be used. This enables an individual to contribute more than the standard concessional contributions cap by carrying forward the unused contributions cap from prior years.
Unused concessional contributions are available on a rolling basis and can be carried forward for a maximum of 5 years, after which time they will drop off. The current year cap is always the first used followed by the earliest available year. Calculating the available cap space, a calculation provided by the ATO, uses contributions made from 1 July 2018, meaning 2018/19 unused contributions will be the first in any calculation.
The following table highlights the use of this measure, in this example we use a salaried individual who earns $100,000 and to date has only received superannuation guarantee contributions:
| Description | 2018-19 | 2019-20 | 2020-21 | 2021-22 | 2022-23 |
| Concessional contribution cap | $25,000 | $25,000 | $25,000 | $27,500 | $27,500 |
| Total unused available cap space | $0 | $15,500 | $31,000 | $46,500 | $64,000 |
| Maximum cap space | $25,000 | $25,000* | $56,000 | $74,000 | $91,500 |
| Total Super Balance at 30 June prior year | $460,000 | $510,000* | $485,000 | $492,000 | $495,000 |
| Concessional contributions made | $9,500 | $9,500 | $9,500 | $10,000 |
? |
| Accrued unused concessional contributions | $15,500 | $31,000 | $46,500 | $64,000 |
You will note that in the 2019/20 financial year, the individual only has a maximum cap space of $25,000. This is due to their TSB at the preceding 30 June being in excess of $500,000. However, despite this, the accrual of unused amounts continues to apply.
So how much can our example member make in the 2022/23 year? Well for cap purposes, inclusive of SG, they can make $91,500 but that doesn’t tell the full picture.
Allocating contributions
Remember that 11 out of 12 months result in contributions being allocated in the same financial year, June is the exception! Contributions made in June must be allocated to the member no later than 28 days following the end of the month, otherwise known as 28th July. Alternatively known as the next financial year.
What does this mean?
This means that in addition to the $91,500 available cap space for the above client, they could contribute a further $27,500 in June 2023 and avail themselves to a personal contribution deduction of $108,500 ($91,500 + $27,500 – $10,500 (10.5% superannuation guarantee). Should they contribute this much? That’s a negative!
If they contribute $27,500, this amount will count towards the 2023/24 concessional cap and the first employer contribution they receive for the year will result in them exceeding their cap, especially now since their total superannuation balance is likely to exceed $500,000. So whilst there is an opportunity to contribute more than the current year’s expanded cap, it comes with consequences of getting it wrong.
It doesn’t just happen
Whilst the unused carry forward amount is calculated by the ATO, the ability to have contributions allocated to the following year is not automated and if you don’t follow a process your client will be hit with an excess contribution determination.
The process
In somewhat of a chicken and the egg scenario, the contribution must be reported in the year it is received, so the SMSF annual return must report the contribution against the member and the member must lodge the appropriate notice of intention to claim a deduction for the full amount they intend to claim.
Then the member must provide the ATO with a request to adjust their concessional contributions form, the form can be obtained via the following link: https://www.ato.gov.au/forms/request-to-adjust-concessional-contributions/.
Trustee obligations
Further to the member responsibilities, the trustees also have a responsibility to acknowledge the original amount and resolve to allocate it within the timeframes afforded by the superannuation regulations. They must also document the allocation in the following financial year. Ultimately this means the financial statements and the trustee records look at odds with each other.
NB. You can order contribution reserving documents via the Smarter SMSF platform that comply with the Commissioner’s guidance in TD 2013/22.
Using either or both – strategy considerations
Where is the value in the strategies?
The carry forward unused strategy is of value to low balance members who have personal income to offset and the capacity to make the additional contribution, there are further strategies that we will consider in an alternate post.
Reallocating contributions to a future year and claiming the deduction in the current year, is primarily a strategy to consider where a unique income event occurs in one year that is unlikely to repeat in the future and the following year’s cap is unlikely to be reached under normal circumstances.
Conclusion
Maximising opportunities for contributions are essential 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 you can stay on target when you have additional funds available. Of course, taking advantage of any strategy requires a complete understanding of the consequences of getting it wrong.
The consequence of getting concessional contribution strategies wrong is the imposition of a marginal tax liability on the contribution, but more importantly it can also disrupt non-concessional contribution strategies.
