How to use the new super catch-up rules

From July 1, averaging for concessional contributions, or “five-year catch-up provisions” start

 

It’s never seemed quite fair that those making a one-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 periods out of the workforce then can’t catch up. But there is actually a wide range of people that can be disadvantaged by super contribution caps … now all that is about to change.

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

In essence, these will be a rolling five-year average, but 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 years prior to that one also.

There are a few points 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 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 per cent rule”.

The 10 per cent rule meant that anyone who earned more than 10 per cent 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 changes apply from July 1. Anyone will be able to make CCs up to their limit, simply by contributing to super.

• Third, it is only on July 1, 2017 (that is, the start of FY18) that the rule begins to work. You won’t be able to start making extra contributions to make up for previous years until after FY19 begins, where you will be able to make contributions going back to FY18. It won’t be fully operational until FY22, when people will be potentially able to contribute for the four prior years (FY21, FY20, FY19 and FY18).

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

Deal for self-employed

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 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.

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 several 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 en

Capital gains tax help

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 2022 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.

Between FY18 and FY22, your CCs would have amounted to $50,000 of a total of $125,000 in caps over that period

By Bruce Brammall, The Australian  20 June 2017

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