Maximising Your Super: Understanding Concessional Contributions and Carry-Forward Provisions

Saving for retirement is a journey that requires careful planning and strategic decision-making. One powerful tool in the arsenal of retirement planning is making concessional contributions to superannuation.

These contributions can significantly bolster your retirement savings while offering various tax savings. Additionally, the introduction of carry-forward provisions provides an opportunity to make up for unused contribution limits from previous financial years. However, it's crucial to understand these concepts fully to leverage their benefits effectively.

What are Concessional Contributions?

Concessional contributions to super are the payments made into your super fund from your pre-tax income. These contributions are also known as "before-tax" or "tax-deductible" contributions.

One important factor to note is that the general concessional contributions cap for the 2023/24 Financial Year is $27,500.00 per annum for an individual. Under the umbrella term of “concessional contributions” are the compulsory Superannuation Guarantee (SG) Contributions (or SGC as they are commonly called) and any contributions that you make and claim a tax deduction for (salary sacrifice or lump-sum).

Please note, that there are penalties and consequences for exceeding the concessional contributions cap. This will be discussed in a later blog post.

Benefits of Concessional Contributions:

Tax Efficiency:

One of the primary advantages of concessional contributions is their tax benefits.

Contributions made into your super fund are generally taxed at a concessional rate of 15%, which is significantly lower than most individuals' marginal tax rates.

For example, Tom Smith is set to receive a bonus of $10,000.00 from his employer. His marginal tax rate is 30.00% + the Medicare Levy of 2.00%. If he receives the bonus as income, he receives approximately $6,800.00 after tax. If he salary sacrifices the funds into superannuation, he only pays 15.00% tax resulting in $8,500.00 being invested within super. Compounding this effect for decades over our working lives, the results are extraordinary.

Boosting Retirement Savings:

By contributing to your super fund regularly, you're effectively building a nest egg for your retirement.

These contributions, along with investment returns, grow over time, helping you achieve a more comfortable retirement.

Imagine the example above, if Tom invests the funds once received after tax and receives a 10.00% return he is left with $7,480.00 after one year. Compare that to if his super fund then went and achieved the same return of 10.00%, he would have $9,350.00 after one year. That difference of $1,870.00 is substantial.

Now imagine that snowball growing bigger and bigger over time with your own increase in income and age over time.

Salary Sacrifice Benefits:

Opting for salary sacrifice contributions allows you to contribute to your super before tax is deducted from your salary. This lowers your taxable income automatically each pay period but above all ensures that funds are invested within super on a consistent and predictable basis.

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Compounding Returns: Concessional contributions benefit from the power of compounding returns. The earlier you start contributing, the longer your money has to grow.

Understanding Carry-Forward Provisions:

Introduced in May 2016, carry-forward provisions allow individuals to utilise any unused concessional contribution caps from the previous five financial years years. This provides flexibility, particularly for those with fluctuating incomes or irregular contribution patterns to catchup on missed space.

The Impact of the 2018-2019 Financial Year:

It's essential to note that the unused concessional contribution cap from the 2018-2019 Financial Year will be lost after 1 July 2024 due to the 5-year rule. This means that any unused cap from that financial year will no longer be available for carry-forward purposes. Therefore, individuals looking to maximise their contributions should consider taking advantage of this window before it closes.

Catching Up:

For individuals who haven't maximised their concessional contributions in recent years, the period leading up to 1 July 2024 presents an opportunity to catch up. By contributing more than the annual cap in the current financial year, you will automatically make use of any remaining unused caps from the 2018-2019 financial year (and so forth).

This strategic approach can will help individual’s bolster their superannuation savings whilst simultaneously providing them with a substantial tax deduction depending on their relevant circumstances.

In conclusion, concessional contributions to super and carry-forward provisions offer valuable opportunities for individuals to enhance their retirement savings while lowering their taxable income. Understanding these concepts and strategically planning your contributions can significantly impact your financial security in retirement.

With the impending loss of unused caps from the 2018-2019 Financial Year, now is the time to take action and make the most of these beneficial provisions.

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