How carry-forward contributions can help you boost your super balance

Business owners draw an income from their work in several different ways and most know that they are responsible for paying themselves superannuation.

As income may vary depending on how the business performs between years, that can affect how much is directed into their own super.

Super payments from employment form part of concessional contribution entitlements, which is taxed at a lower rate of 15%, and is capped at $27,500 per year from the 2021-22 financial year. That has been increased from $25,000.

But if these contributions are less than the cap, the remaining cap space doesn’t need to be lost. The difference can be rolled over and carried forward for up to five years.

This provision allows business owners, as well as individuals, to take advantage of unused contributions to add more into their super.

These rules provide flexibility around the timing of contributions to match year-to-year changes in cash flow, as well as manage taxation outcomes each financial year.

Is anyone eligible for the carry-forward provisions?

There are some constraints to accessing unused concessional cap space. 

Carry forward provisions only extend from the previous five financial years, starting from July 1, 2018. That means the full five-year carry-forward period will only be available from financial year 2023-24.

Individuals must be eligible to make concessional contributions, including observing the age-based limitations and a person’s total super balance must be less than $500,000 at the end of June in the previous financial year.

All super interests, such as pension benefits and benefits in multiple funds, are included in that total balance, so make sure you have a discussion with a financial advisor. 

How is carry-forward useful?

Higher than normal cashflow may come about from many means, such as dividends, inheritances, or asset sales. 

These provisions are effective in helping individuals use the proceeds from a financial windfall to boost their superannuation balance. 

Where the increased cash flow is known in advance, the individual could consider making only compulsory concessional contributions in the financial years leading up to the year where cashflow is expected to increase.

These voluntary contributions also typically reduce an individual’s taxable income during the financial year that the contribution is made.

Capital gains are added to an individual’s taxable income in the year that the gain was crystallised, increasing total tax payable but concessional contributions can provide an offset to the crystallised gain.

How does carry-forward work?

Let’s consider a business owner who draws a salary from their business. In the table below, we can see they had made concessional super contributions of $14,000 in 2018-19.

The owner was able to make a slightly higher contribution of $15,000 in 2019-20, but that was still $10,000 below the cap, so that was rolled forward to the next year.In this scenario, the owner had $11,000 unused portion of the cap, which was carried forward to the next financial year, increasing the carry forward cap to $36,000.

By 2021-22, with the new increase to the concessional cap, it had been extended out further and now sits at $57,500.

Taking advantage of the higher cap

In 2021-22, our business owner’s financial situation changed slightly. The owner, who was in the 39% marginal tax bracket, made $17,000 in concessional super contributions during the year, as shown below: 

After the $17,000 super contribution was taken into account, the carry-forward cap was reduced from $57,500 to $40,500. The business owner was now able to reap a benefit from the increased cap.They also crystallised a capital gain of $100,000 through the sale of an asset. The taxable income from the capital gain was $50,000, after the 50% GCT discount was applied. 

The business owner channelled $40,500 into their super at the concessional rate, leaving a taxable income from the asset sale of just $9,500, and cutting the tax they would have paid by $15,795.

How do I get started?

Business owners should speak with a financial advisor before making superannuation contributions to ensure they meet the eligibility criteria.

There are some important issues that business owners should consider before using the carry-forward concessional cap:

• Superannuation guarantee, salary sacrifice, and personal deductible contributions will all count toward the concessional cap;
• Concessional contributions are first allocated to the current year’s contribution cap, then unused cap space is used on a first accrued, first used basis (that is, the oldest unused cap space);
• You can check your available carry-forward cap space in your MyGov account or via your accountant;
• No ‘election’ is required, the carry-forward cap is automatically applied;
• This strategy may not be tax effective for those with insufficient taxable income;
• If an individual exceeds the $500,000 total super balance rule, the prior year’s unused concessional cap space cannot be used; and
• When making a personal deductible contribution (s290):
  • A ‘Notice of intent to claim or vary a deduction for personal super contributions’ must be lodged with the ATO.
  • The super fund must continue to hold the contribution in accumulation phase.
  • The notice must be submitted before lodging the following year’s tax return.
  • The claim can be denied if taxable income is reduced below $0, which means the contribution would count toward the non-concessional contribution cap.