With the end of the financial year fast approaching, now is the perfect time to maximise your superannuation contributions to help you save tax and get more into your super.
At Finextra Wealth, we can inform, educate and offer the right advice to put you in a more advantageous position for retirement. We’ll simplify the complex world of finance to help save you money and time and reduce any financial stress.
Let’s take a look at the specific rules that apply to concessional and non-concessional contributions.
Concessional contributions
Concessional contributions are an excellent opportunity to boost your super while enjoying favourable tax treatment. By contributing from your pre-tax income, you’ll only pay a ‘concessional’ tax rate of 15% (or 30% if you earn over $250,000 annually).
Concessional contributions include:
- employer super contributions (e.g. Super Guarantee or salary sacrifice)
- personal tax-deductible contributions
There are caps on how much you can contribute as a non-concessional contribution. For the 2022-23 financial year, the cap is $27,500 per year. But if you don’t use the full amount of your concessional contributions cap in a financial year (and your super balance is under $500,000 as at 30 June of the prior financial year), you can use the ‘Carry Forward’ rule to boost your super and reduce your personal income tax liability, a ‘win-win!’.
How the ‘Carry Forward’ rule works
When you don’t use the total amount of your concessional contribution cap, you can carry forward the unused portion for up to five years (from 2018/19 financial year).
For example, if you make concessional contributions of $10,000 in the 2022-23 financial year, the $17,500 unused portion of your cap is ‘carried-forward’ and available to be used within the following 5 financial years .
The amount of unused concessional contributions you can carry forward depends on how much you’ve previously contributed. The contribution cap limits have recently increased from $25,000, so if you’re considering using this strategy, it’s essential to accurately calculate how much you can carry forward based on the previous year’s caps.
Reducing taxable capital gains
When you make a personal concessional contribution, you can claim a tax deduction to help offset taxable capital gains. Because you’re typically paying a lower tax rate (15%) for these contributions, this strategy is a great way of increasing your superannuation balance, while reducing your personal income tax liability.
For example, if you sell an investment property and crystallise a $100,000 taxable capital gain, this will be added to any other taxable income to calculate your total amount of tax payable. One way of reducing this amount is to make a concessional contribution to super.
Non-concessional contributions
Non-concessional contributions refer to after-tax contributions. If you’re close to retirement, using non-concessional contributions can effectively boost your superannuation balance before you commence an income stream.
When you make a personal non-concessional contribution, you may also qualify for a Government co-contribution or a spouse contribution tax offset if you’re making a spouse contribution, which can increase your super balance.
There are various types of non-concessional contributions, such as:
- Any contributions that you or your employer makes from your after-tax income
- Spouse contributions
- Personal contributions
- Most transfers from overseas super funds
Since 2021, the non-concessional contributions cap has been $110,000 per year. If you contribute more, you may have to pay extra tax. But depending on how much is in your super and how old you are, you could take advantage of bring-forward arrangements that allow you to contribute more to boost your super balance.
Be mindful that some contributions don’t count towards your cap. For example, if you’re looking to sell your home and downsize, making a contribution from the sale of your home doesn’t count towards the cap, allowing you to contribute more to your super.
Bring Forward Rule
The Bring Forward Rule means you can make up to three years’ non-concessional contributions in just one financial year. To be eligible from 2022-23, you must be under 75 years old, with less than $1.7 million (the general transfer balance cap) in your super.
It’s an effective retirement planning strategy allowing you to boost your super balance by up to $330,000 without paying additional tax. But depending on how much you contribute, it can prohibit you from making additional non-concessional contributions in the following two-year period (because you’ve effectively ‘brought forward’ your cap limits from the next two years).
If you do trigger the bring forward rule and you increase your total super balance to equal or greater than the general transfer balance cap (currently $1.7 million), be aware that your non-concessional contributions will reduce to nil.
For example, your super balance is $1.5 million in the 2021-2022 financial year, and you make a non-concessional contribution of $270,000, triggering the bring forward rule. Your contribution brings your super balance to $1.77 million on 30 June 2022, meaning your non-concessional contributions cap for the 2022-2023 financial year is nil.
Because of recent changes brought in, it’s also important to know that if you trigger the bring-forward rule in the 2022–23 financial year, you’ll have different non-concessional contributions cap amounts and be subject to different super balance thresholds (in comparison to people who triggered their bring-forward period in the 2020–21 financial year).
These are just some tax-effective strategies you can use to boost your super in the lead-up to the end of the financial year. If you’re interested in learning more, contact us today.
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