Basics of the New 5-Year Concessional Contribution Catch-Up Rules
This new rule can be a bit confusing to some, but it’s really simple and it offers a lot of advantage to those who want to maximize their concessional contributions toward their super.
Concessional contribution is the amount you put into your super before any tax is applied. This includes your before-tax employee salary sacrifice, personal contributions that are tax-deductible, and Superannuation Guarantee.
The new 5-year catch-up rule can be maximized by those who have a total super balance less than $500,000 before the start of 1 July 2018. They can carry over unused amounts on their concessional contributions cap onto the next year and add it to that year’s limit.
The current concessional contributions cap is $25,000 a year. With the new rule, if your annual contribution amounts to $20,000 per year, you can carry over the unused $5,000 onto the following year, giving you a total of $30,000 concessional contributions cap.
Only the unused cap from the year 2018-2019 can be carried over to the 2019-2020 contribution year. This new law doesn’t allow you to carry over the unused cap from 2017-2018 or from the previous years.
The unused caps can be carried over for up to the next 5 years.
This new law is beneficial to those who have broken work patterns and can’t afford to contribute for the year or those who got into a maternity leave who weren’t able to work for months.
Here are examples to help clarify the advantages this new rule brings:
- Example 1
Anne took a 12-month leave and she wasn’t able to make any contribution for the year 2018. This year, she’s back to work and has computed that she’ll be able to make contributions amounting to $20,000. If she carries over the unused cap from 2018 and adds it to the current year’s cap, she’ll have a total concessional contributions cap of $50,000. Now, subtracting the $20,000 contribution she’ll make this 2019, she’ll still have $30,000 of the unused cap she can carry over the next year.
- Example 2
Fast forward to the year 2020, let’s say Anne’s total super balance amounts to $510,000. This exceeds the requirement of less than $500,000 to be able to utilize the unused contributions cap from the previous year. This means she won’t be able to use the $30,000 cap boost from the previous year. She’ll have to stick with the standard cap of $25,000 for the current year.
If she makes a contribution of $20,000 for 2020, she’ll have another $5,000 left from the contributions cap. This can be added to the $30,000 from the previous year and have it carried over the following year.
- Example 2
It’s now 2021 and Anne has a total unused cap of $35,000 carried over from the previous years. Her total super balance dropped down to $499,000 because of bad market conditions. This means she can use the $35,000 and add it to the current cap, giving her a total of $60,000 contributions cap for the year 2021.
With the new rule, you can keep on carrying over the unused caps from the previous years but you have to take note that they have a 5-year expiry date. So, if you have an unused cap of $2,000 from 2018, you have to use it by 2023. If unused, it will automatically be deducted from the total unused cap you can carry over for the year 2024.
The good thing is that the system utilizes the earliest unused cap first before filling up the next ones. Using Anne’s situation as an example, the total unused cap she has for 2020 can be subdivided into $25,000 from 2018, $5,000 from 2019, and $5,000 from 2020. If by 2021, she manages to make a contribution of $55,000, it’ll fill up the $25,000 cap for 2021 first, and then the $25,000 from 2018, and then the $5,000 from 2019.
The new rule for carrying over unused concessional contributions cap bring about a number of benefits to citizens who are preparing their retirement funds. It gives people the chance to use the underutilized amount on the contributions cap and allows more flexibility on when to contribute big amounts to their super.