Plan now to take advantage of 5-year carry forward rule: expert

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Meg Heffron, director of Heffron, said trustees who started using the scheme in its first financial year in 2018–19, now need to start planning regarding their next steps.

“This year is slightly unusual in a couple of respects when it comes to contributions. That makes it even more important to get the planning right well before 30 June 2024,” she said.

“Perhaps most importantly, for those eligible to use the five-year catch-up contribution rules for concessional contributions, this year (2023–24) is the last year in which the unused cap carried forward in the very first year of the scheme (2018–19) can be used. Next year, it drops off because these amounts can only be carried forward for five years.”

Ms Heffron gave an example of how these changes will work for a fictitious client called Anna, who had $400,000 in super at 30 June 2023, meaning she can use the catch-up rules this year if she wants.

Anna doesn’t sacrifice her salary but has compulsory contributions from her employer. She earns $150,000 per annum and is in a high tax bracket (37 per cent), plus the Medicare levy, and is looking to make some tax deductions.

In 2018–19, Anna only used part of her concessional contributions cap and has $10,000 left, which she can use this year, but if she doesn’t by 1 July 2024, the opportunity will be gone and she can only use the caps she has left over from 2019–20 onwards.

“It’s important to note she would need to use all of this year’s cap ($27,500) first before being allowed to use the $10,000 she has left from 2018–19 and unfortunately she can’t elect to use that $10,000 while carrying forward some of her 2023–24 concessional contribution cap for future use,” Ms Heffron said.

“But if she can manage it, there’s a $10,000 tax deduction up for grabs in 2023–24 that will otherwise go begging.”

Ms Heffron said if Anna doesn’t use the $10,000 from 2018–19 this year, she should plan to do so in future years, as each year going forward, another unused amount from five years ago will drop away. Once her balance goes over $500,000, she won’t be able to use any of the previous years’ cap amounts that she’s carried forward.

Ms Heffron added there is a strategy Anna can use if she has a partner who has not used their old concessional cap amounts.

For example, if Anna’s partner has $600,000 in super, Anna could consider “splitting” all her concessional contributions, even her super guarantee contributions, with her partner.

“In effect, they come into her super account during the year but get moved to the partner’s in the following year which will allow her to keep adding money to super using all possible tax deductions without growing her balance too quickly and ruling her out of using the carry forward rules,” Ms Heffron said.

“Once Anna has more than $500,000 in super, her partner can return the favour and split their future concessional contributions to Anna which would also make sense if her partner didn’t have any unused concessional cap amounts to carry forward or if their super contributions were subject to Division 293 tax.”

Ms Heffron said the stage 3 tax cuts will make a difference to the tax paid by people on high incomes and although they may not be getting as large a tax break as originally planned, the principles are the same.

“In a way, that incentivises them to contribute as much as they can this year via concessional contributions because the deduction is worth more in 2023–24 than 2024–25,” she said.

Keeli Cambourne
02 February 2024
smsfadviser.com