Maximising super contributions and carry forward concessional contributions: A guide for SMSF trustees
11 August 2023
As an SMSF trustee, maximising your super contributions and carry forward concessional contributions can provide new opportunities for wealth creation. But, with legislation constantly being updated, it can be hard to keep track of the contribution rules and strategies available to you and even harder to apply them.
In the last two years alone, changes impacting superannuation contribution rules have included:
Transfer Balance Cap increased from $1.7m to $1.9m.
Increase of the Superannuation Guarantee (SG) from 10.5% to 11%.
Starting from 1st January 2023, you may be eligible to make a downsizer contribution if you're 55 years or older.
From 2022, individuals aged 74 and below may be able to utilise the 'bring forward' non-concessional contributions rule.
Today's guide provides an overview of how you could leverage these changes to meet your investment goals.
Understanding super contribution rules
There are two types of contributions in an SMSF. The first is known as a concessional contribution, and the second is a non-concessional contribution.
Concessional super contributions are contributions made into your self managed super fund using income that has not been taxed at your marginal tax rate. It's also known as the before-tax or pre-tax contribution.
You or your employer can make a concessional contribution, subject to the contribution eligibility rules. Generally, there are three types of concessional contributions:
Superannuation guarantee (SG) contributions: These are mandatory contributions your employer makes on your behalf. From the beginning of the 23/24 financial year, the SG contribution will normally be 11% of your salary or wages.
Salary sacrifice contributions: These contributions result from an arrangement with your employer where you voluntarily forfeit part of your wages to be directed towards the super fund.
Personal concessional contributions: These are contributions that you make personally, directly from your bank account. You can then claim a tax deduction during tax returns.
The non-concessional contribution is a contribution made with after-tax income. In other words, the income used has already been subjected to taxation at the individual's marginal tax rate. With the recent changes, many more individuals under the age 75 may now make a non-concessional contribution, subject to their particular circumstances. You cannot claim tax deductions for non-concessional contributions.
Super contribution caps
The current super contribution cap for concessional contributions is $27,500 per year. As it is based on the concessional cap, the contribution cap for non-concessional contributions is $110,000 per year.
Recent changes to super contribution
There have been several recent changes related to super contributions rules. Here's an overview of these changes and how they might affect your self managed super fund.
General transfer balance cap (TBC) increased from $1.7m to $1.9m
The TBC increase came into effect on 1st July 2023. More importantly, it brings in two opportunities for SMSF trustees. Here's how:
If you plan to start a pension post 1 July, you can now transfer $200,000 more compared to previous years. You might also benefit from this change if you already commenced your pension. Specifically, you could receive an indexation to your TBC, allowing you to transfer more savings into your pensions.
Prior to 1 July, people under 75 could not make a non-concessional contribution if their TSB exceeded $1.7m as at the end of the prior year, but with the threshold now having been lifted to $1.9m, opportunities could open up for some individuals.
Super guarantee (SG) increase
From 1st July 2023, the SG increased from 10.5% to 11%. The SG is scheduled to increase by 0.5% annually until it reaches 12% in 2025. Be sure to confirm that your employer is making the right percentage contribution in light of these changes.
Age eligibility of downsizer contribution decreases
Individuals 55 years or older may now be eligible to make downsizer contributions. A reduction in the eligibility age came into effect on 1st January 2023. The previous eligible age was 60 years.
Changes to bring forward non-concessional contributions
In 2023, individuals below 75 years of age may now be eligible for bring-forward non-concessional contributions. This option was previously limited to individuals aged 67 or younger. The rule allows you to potentially bring forward the next two years' worth of contributions. However, you must check some boxes to be eligible, including:
Your total super balance must be below $1.68 million as of 30th June 2023;
You must not have triggered the bring forward rule in the prior two years; and
You must be under 75 years.
Carry forward concessional contributions
It's also worth noting the concessional contribution rules. Usually, the annual concessional contribution is indexed in $2,500 increments. For instance, the 2017/18 to 2020/21 financial year cap was $25,000. The cap increased to $27,500 for 2021/22 to 2023/24 financial years.
However, you can bypass this concessional contribution cap by utilising carry forward concessional contributions.
Carry forward concessional contributions allow you to utilise any unused portion of your concessional contributions cap from previous financial years. You can use unused contributions from five years before (starting from the 2019/2020 financial year).
Key things to note:
2018/2019 is the first year that unused contributions start to accrue.
2019/2020 is the first year that you can carry forward unused contributions.
To be eligible, you must meet the following requirements:
Have a total super balance of less than $500,000 as of 30th June of the previous financial year.
Be under 67 years or if you are between 67 and 75, have satisfied the work test during the current year.
Maximising super contributions
You'll need a healthy amount in your super account to create a comfortable retirement. In most cases, making minimum contributions will not afford you this goal. You'll need strategies to maximise your superannuation contributions without incurring unreasonable costs. Here’s some suggestions.
Assess individual contribution caps and carry forward amounts
Generally, the concessional contribution cap is $27,500 for all ages. If you have not contributed the whole $27,500 in a financial year, you may be able to use carry forward concessional contributions to carry the unused amount to the next year. For example, if you had unused contributions from the last two years, you may be able to use those unused caps to increase your super balance to assist you in reaching your retirement goals faster.
Conversely, the non-concessional contribution cap is $110,000. However, if you're below 75 years of age, you may be able to bring forward up to three years' worth of contributions in a single year, provided you meet the mentioned requirements. In other words, you may be able to contribute an additional $330,000 ($110,000 x 3 = $330,000) in a financial year.
Knowing whether you are eligible for the above contributions can help you decide how and when to maximise your super contributions.
Set financial goals and retirement objectives
First, calculate the difference between your estimated retirement expenses and projected income sources in retirement. How much additional income will you need to generate? With this information, it'll be easier to determine the level of additional superannuation contributions you may need to make.
Next, regularly review and adjust your investment strategies based on your goals and super changes. For example, perhaps you could take advantage of the revised age limit for the downsizer contributions. This way, you can increase your SMSF funds while moving to a new family home which better suits your personal situation.
Maximise concessional contributions
Concessional contributions are beneficial for the following reasons:
You may be able to claim tax deductions for these contributions. This will, in most cases, lower your overall tax liability.
You may be able to carry forward any unused portion of your concessional contributions cap each year for a period of five years.
Strategies to maximise concessional super contributions
The strategies shared below can help you maximise concessional contributions cost-effectively.
You can ask your employer to pay a portion of your pre-tax portion into your super account. This is also known as salary sacrifice and will increase your SMSF contributions while lowering your tax liability. This will be in addition to the 11% SG the employer is mandated to contribute.
Increasing the super balance of your spouse
You may also be able to split concessional contributions with your spouse. This means transferring concessional contributions from your superannuation account to your spouse's super account at the end of each tax year.
This strategy can be beneficial for keeping your super balance within specific thresholds, such as the $1.9 million transfer balance cap or $500,000 catch-up contribution limit. By splitting super contributions with your spouse, you can effectively manage your superannuation balance while maximising available benefits and exemptions.
Utilising carry forward concessional contributions
If you have unused concessional contributions from the 2018/19 financial year, you may be able to utilise carry forward concessional contributions to maximise your super contributions. This could let you contribute more than the annual $27,500 cap.
Maximising non-concessional contributions
In addition to the above, you could also maximise your non-concessional contributions to reach your goals faster.
Utilising the bring-forward rule
If you are younger than 75 years, you may be able to bring forward up to two future years' worth of non-concessional contributions. This could allow you to contribute up to $330,000 in a single financial year or over three years.
It may be a valid strategy if you have recently received an inheritance or money from an asset sale and are considering adding to your superannuation balance.
You may also be able to contribute up to $300,000 as an individual or $600,000 as a couple if you recently sold your home. This applies even if you have a total super balance of more than $1.9 million.
However, you must have owned the home for over ten years to be eligible. You must also be 55 years or older.
Finally, if your spouse has a lower income or is not working, you may be able to contribute to their super account with after tax money and claim a tax offset. You could also use this strategy to help manage your cap limit and leave room to utilise the bring-forward rule.
Key takeaways and next steps
We've discussed several key changes, including the increase of the transfer balance cap from $1.7 million to $1.9 million, the rise in the Superannuation Guarantee (SG) from 10.5% to 11%, the eligibility of downsizer contributions at age 55, and the expansion of the bring forward non-concessional contributions rule to individuals aged 74 and below.
Keeping up with these changes is critical as it can help you maximise your super contributions and build a healthy retirement nest egg. However, managing an SMSF is a lot of work. Research shows that it can take more than 100 hours per year. That's why it's recommended you work with an SMSF accounting expert to regularly review your SMSF strategy.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Group Limited.
This article contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.