A Powerful Tool for Tax Efficiency & Retirement
By Peter Richards
In the ever-evolving landscape of superannuation, staying informed about the latest strategies can significantly impact your financial future. One such strategy that can fly under the radar is the catch-up superannuation contributions. This strategy can be a game-changer, especially for those who haven’t maximized their super contributions in previous years.
The catch-up superannuation contributions strategy offers a unique opportunity to boost your retirement savings while potentially reducing your tax bill. Whether you’ve been out of the workforce, had other financial priorities, or simply didn’t maximize your super contributions, this strategy can help you make up for lost time.
What Are Catch-Up Super Contributions?
Most people are aware that you can now contribute up to $30,000 per year ($27,500 last year) to your superannuation as a tax-deductible contribution. However, not everyone knows that if you haven’t used your full concessional contributions cap in any of the past five years, you can carry forward the unused amounts and make catch-up contributions.
This opportunity is available if your super balance was less than $500,000 as of 30 June of the previous financial year. This means that not only can you contribute the standard $30,000 this year, but you can also top it up with any unused contributions from the past five years.
For instance, if you contributed only $10,000 last year, you could potentially catchup $17,500 for last year. If you hadn’t contributed at all in of the last five years this could allow you to catchup $132,500 this year which when added to the $30,000 for this year gives a potential tax deduction of $162,500.
Real-Life Scenarios: Capital Gains and Tax Efficiency
A particularly compelling scenario where this strategy can be used to significantly reduce tax liabilities follows a capital gain event.
Imagine you’ve just sold an investment property and realized a substantial capital gain. This windfall can also mean a hefty tax bill. But what if you haven’t been making the maximum super contributions over the past few years? Here’s where the catch-up contributions come into play.
For example, let’s consider Louise, who earns a gross salary of $90,000 a year. She sells an investment property, resulting in a taxable capital gain of $200,000. Without any tax planning, Louise faces a tax bill of $102,438. However, by utilizing the catch-up contributions strategy, she can contribute an additional $87,050 to her superannuation fund over and above the $30,000 allowable for this financial year.
| Year | Cap $ | Actual $ | Catchup $ |
| 2019-20 | 25,000 | 8,550 | 16,450 |
| 2020-21 | 25,000 | 8,550 | 16,450 |
| 2021-22 | 27,500 | 9,000 | 18,500 |
| 2022-23 | 27,500 | 9,450 | 18,050 |
| 2023-24 | 27,500 | 9,900 | 17,600 |
| TOTAL | 132,500 | 45,450 | 87,050 |
This contribution not only boosts her retirement savings but also slashes her tax liability. After accounting for the tax payable by the super fund, her overall tax savings could be as much as $27,608.
The Role of Financial Advisors and Accountants
While the catch-up contributions strategy is a powerful tool, it’s essential to approach it with the right advice. As financial advisors we work closely with accountants to ensure that clients not only maximize their tax benefits but also align their super contributions with their overall financial goals.
In scenarios involving significant capital gains, an accountant might first identify the potential tax liability. The financial advisor then steps in to structure the super contributions effectively, ensuring compliance with the relevant regulations while optimizing the client’s financial position.
What the ATO Says
For more detailed information from the Government on catch-up contributions visit the Australian Taxation Office’s page on concessional contributions here.
Your Specific Situation
Like all financial strategies, it’s crucial to get personalized advice tailored to your specific circumstances to ensure that you’re making the most of the opportunities available to you, securing your financial future while managing your tax obligations effectively.
Disclaimer
People & Partners Wealth Management Pty Ltd ABN 67 127 250 613 is a corporate authorised representative of Fortnum Private Wealth Ltd ABN 54 139 889 535, holder of Australian Financial Services Licence (AFSL) No. 357 306. The content of this article is for general informational purposes only and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation, or needs. Any advice we provide will be detailed in a formal advice document. The opinions expressed in this article are those of the authors at the time of writing and should not be taken as a recommendation to act. To the extent permitted by law, Fortnum Private Wealth Ltd and its associates accept no liability for any loss or damage incurred as a result of reliance on this communication.
