Use it or lose it as historic super cap prepares to expire
Jordan Kennedy is a Partner at accounting and advisory firm Pitcher Partners Sydney.
Australians could be sitting on a golden opportunity to spur their super savings this year — but if they don’t act fast, they will miss out.
That’s because in July they will lose the entitlement to claim any unused superannuation tax concessions from 2019-20, known as the concessional cap.
The concessional cap is the total annual amount that can be contributed into super by a person’s employer, through salary sacrifice or claimed as a tax deduction, before the person is charged at the ordinary taxable rate.
In other words, for most Australians there is a gap between what they or their employer contribute each year and the total amount they could contribute, taking advantage of tax concessions.
In 2019-20, that capped amount was $25,000, and unless people were making or receiving contributions above the superannuation guarantee, they would have needed to earn about $260,000 to hit the cap.
If they didn’t, there may still be ‘available’ cap that has built up over the last five years and can be used to access the 15% tax rate on earnings — until July 1, when the cap expires.
While this sounds technical, reviewing past superannuation contributions and checking to see that caps have been maxed out is one of the easiest ways to achieve a tax deduction.
Of course, there are a few aspects to this strategy that bear consideration.
The concession cap system is a use it or lose it play. Any gap between contributions and cap will expire after five years, so this is the last chance to retrospectively boost your superannuation using the 2019-20 cap.
That said, as this is the first year we have seen the cap expire, it might have slipped the minds of many.
Even if you have maxed out the cap for that year, you should take the opportunity to look at more recent years as well to see if you have been carrying forward an available pool of tax concessions.
The second thing to note is that the vast majority of Australians will have a tax cap opportunity available.
For anyone on an average salary, the cap gap can grow by $10,000 or more each year, unless additional contributions are made through salary sacrifice or as a tax deduction.
The concession is also available for those who might have stopped work to have children or who are reducing their workload approaching retirement.
Check with your accountant or your super fund — you might have tens of thousands of dollars in tax concessions available for use.
Thirdly, consider your timing.
If you know you will have tax capacity in coming years, try to time your use for those years where you have a significant tax event, such as realising capital gains.
This can reduce your tax liability without disrupting your other plans.
In this case, seeking strategic advice is extremely important to determine the optimal outcome for your circumstances.
And finally, recognise there are exceptions.
People whose superannuation balance is already over $500,000 are excluded from taking advantage of the cap rollover, but could still benefit from advice on how they should balance their tax liabilities while maximising their superannuation.
Whatever your circumstance, speaking to a qualified, independent advisor is the first step to ensure you are working within the complex rules that govern super and taking best advantage of the tax concessions available.
But if there is an opportunity to reduce your tax liability for limited effort, you would be mad not to explore your options.
Image credits: Shutterstock