Getting ready for super catch-ups

 

Happy smiling young business woman showing five fingers, isolated on white background

 

 

SUMMARY: Time to have a proper look at the five-year catch-up provisions – and how to make the most of them.

It’s been a long-time coming for super members to get some sort of averaging provisions for tax-deductible contributions.

The self-employed often struggle with annual “use them or lose them” concessional contribution limits.

It’s never seemed quite fair that those who make a once-off capital gain couldn’t get a little extra into super to help with capital gains tax. And, as we all know, women end up with lower super balances because they tend to spend times out of the workforce, then can’t catch up.

From 1 July, 208, we get averaging for concessional contributions, colloquially known as the “five-year catch-up provisions”.

In essence, these will be a rolling five-year average, but where you can only catch up in the past. That is, you can’t put in, say, $50,000 to cover the current year’s limit, plus the following year. You could put in $50,000 if you wanted to cover this year and, say, the previous year, if you hadn’t made any CCs. Or for any year in the three ones prior to that one also.

There are a few things to note about the new rules.

First, you will only be able to use these five-year provisions if you have less than a total of $500,000 in super. Above that limit and you are restricted to the same annual, use-it-or-lose-it, $25,000 CC limit as everyone else.

Second, this new rule will gain most of its power for employees because of the removal of another rule – the “10% rule”.

The 10% rule has meant that anyone who earned more than 10% of their income from being an employee, could not make personal deductible contributions. They had to, in effect, use salary sacrifice through their employers.

This changed from 1 July. Anyone will be able to make CCs up to their limit, simply by making a contribution to your super fund..

Thirdly, it is only on 1 July 2018 (that is, the start of FY18) that the rule begins to work. You won’t be able to start to make extra contributions to make up for previous years until after FY20 begins, where you will be able to make contributions going back to FY19. It won’t be fully operational until the FY23 year, when people will be potentially able to contribute for the four prior years, FY22, FY21, FY20 and FY19.

So, where are the real advantages to this new rule?

Self-employed 1 – as an averaging provision

For the self-employed, particularly in the early years of operation, income can be very lumpy, from one year to the next.

If the net income available for you to take home is only $40,000 for a given year, then opting to put some of that into super could be a tough decision to make, particularly if your personal annual expenses are higher than that and you haven’t actually earned enough to meet those expenses.

But the following year (or some year in the next couple of years) comes, with a better income, of say $175,000, then making a total of $25,000 of contributions might be easier. You will also have the flexibility to make extra contributions to make up for previous year shortfalls.

Self-employed 2 – as a tax management tool

Then there is the straight tax management for those self-employed people whose income regularly flops either side of the top marginal tax rate, which kicks in at $180,000.

If income bounces from $150,000 to $250,000 over the course of a number of years, it could make sense to pay larger amounts of super when closer to the top end of that range, and less when near the bottom end, as you swing between a 47% marginal tax rate (including Medicare Levy) and 39%.

If you earn $160,000 one year, then $240,000 the next, you might choose not to put any money in super the first year, but $50,000 in the second year, reducing your taxable income from $240,000 to $190,000.

Making a second $25,000 CC in the second year has saved you an extra 10% in marginal tax rate (the difference between 49% and 39%), meaning a further tax saving of $2500.

Obviously, you are taking a risk that you won’t earn that income the following year. And you need to be mindful of the reduction in the Division 293 limit from $300,000 to $250,000 for the extra 15% tax on contributions.

Many business owners use family trusts to help manage their tax, by having corporate beneficiaries being able to hold income from the business, sitting as fully franked dividends in the company beneficiary.

The catch-up provisions will give the self-employed using that strategy an extra option for tax management.

Helping with capital gains tax problems

Made a big capital gain? Have some room left in your cap via the five-year catch-up rules? Here’s how it can save you tax.

Let’s fast forward to the 2023 financial year. You’re an employee and your employer has been putting in $10,000 in CCs for you each year. But that’s all the contributions that have been made on your behalf.

During FY19 to FY23, your CCs would have amounted to $50,000 of a total of $125,000 in caps over that period.

And you’ve just sold a property, making a significant gain. You have the ability to potentially contribute a further $75,000 as concessional contributions under the catch-up rules.

(Be aware that capital gains will add to income and, depending on your situation, could lead you to be above the new Division 293 limit of $250,000. If you find yourself above that limit, then you might have to pay a further 15%, making a total of 30%, on CCs.)

In and out of the workforce

And, obviously, those who have interrupted work patterns will benefit from the new catch-up rules.

Particularly those who take time off for children, or to study. If no contributions are made during a three-year period, then an extra $75,000 could be made on top of the regular $25,000 in the fourth year.

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The best way of making contributions is still always going to be making the full CC available to you consistently every year. Not the least of which being the value of compound growth from those first few years, into year four and five of a given five-year period.

But the catch-up rules are an important progression and something to keep in mind, from here on in, particularly as to how you might be able to use the rules to your benefit.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.

 

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