Insight

Make a super plan for the new year

28 February, 2021

On 1 July 2021, both the concessional and non-concessional superannuation contribution limits, also known as ‘super contribution caps’, will rise.

Why have the contribution caps increased?

The concessional contribution cap is indexed upwards in increments of $2,500 based on Australians’ average weekly ordinary time earnings (AWOTE). The non-concessional contribution cap is calculated as 4 times the concessional contribution cap. The AWOTE figure immediately prior to the current concessional contribution cap was $1,533.40 in the December 2016 quarter. The December 2020 AWOTE figure was $1,711.60, which means the concessional cap will increase to $27,500 from 1 July 2021.

The current and likely new contribution caps

Current concessional contributions cap

New concessional contribution cap1

$25,000

$27,500

Current non-concessional contributions cap

New non-concessional contribution cap1

$100,000

$110,000

1 These increases are subject to the release of average weekly ordinary time earnings (AWOTE) figures for the June 2021 quarter.

A drop in your total super balance at 30 June 2020 may also provide you with an opportunity to contribute more to super compared to what you may have otherwise.

What does this increase mean for you?

Any increase in the super contribution caps means you may increase how much you can contribute to super. The tax benefits plus the compounding of returns can make a substantial difference to your final super benefit.

Additional concessional contributions to super can be made by ‘salary sacrificing’ through your employer or via ‘personal deductible contributions’.

Which contributions - concessional or non-concessional?

You should consider whether to make non-concessional contributions or to maximise your concessional contributions. Additional concessional contributions can reduce your taxable income and your end-of-year tax liability. Concessional contributions are subject to just 15% tax on entry to your super fund compared to your upper marginal tax rate which could be as high as 37% or 45% if you’re in one of the highest tax brackets. An additional 15% tax may apply to concessional contributions if your income is over $250,000.

How to make concessional contributions

Additional concessional contributions to super can be made by ‘salary sacrificing’ through your employer or via ‘personal deductible contributions’. Both methods have the same tax benefit so the method you choose comes down to what suits you:

Salary sacrificing comes out of your pre-tax salary and reduces your net taxable income meaning you may pay less tax on your personal income.

Personal deductible contributions contributions are paid by you, and you can then claim a tax deduction when completing your tax return. If you choose this method, you need to submit a form to your super fund by a certain time advising your ‘intent to claim a deduction’ on your super contribution.

Making the most of ‘catch up’ contributions

‘Catch up’ contributions may allow you to use the previous years’ unused contribution caps in the current financial year if you meet certain requirements. The 2018/19 financial year was the first financial year you could accumulate unused concessional contributions. Unused carried forward concessional cap amounts expire after five years.

Non-concessional contributions

Non-concessional contributions do not entitle you to a tax deduction but you won’t pay any additional tax as you’ve already paid tax via your personal income tax liability. Also, earnings on the contributions are taxed at only 15% (not your marginal tax rate) and are tax-free once you access them as either a lump sum or a pension after age 60, when you retire and satisfy a condition of release.

Making non-concessional contributions to super might benefit you if you are seeking to contribute larger lump sum contributions.

Making the most of the ‘bring forward rule’

If you were age 64 or less at 1 July 2020 you may be eligible to use the ‘bring forward rule’, ie bring forward and use up to two future years’ worth of your non-concessional contribution caps. Depending on your total superannuation balance this may allow you to contribute up to $300,000 (3 x $100,000) into super this financial year. However, if you wait and the cap increases from $100,000 to $110,000, the bring forward amount will increase to $330,000 next financial year. You generally need to meet a 'work test' if you are 64 to 74 years old at the time of contribution.

Legislation is pending to increase the age at which you can trigger the bring forward rule from age 64 or younger as at 1 July of the relevant financial year to age 66 or younger.

With potential increases in the contributions caps on the horizon, 2021 may be a good year to revisit how much you are contributing to super and make a super plan for the future. Please contact us and we can help.