Since the purpose of the superannuation system is to encourage people to save for their retirement, and since so many people learn about superannuation far too late, the government brought in a way to use your previously unused contributions to top up your super. In addition to growing your retirement savings, this opens up a host of other tax planning strategies.
Quick Links
What are Carry Forward Contributions
Benefits of Carry Forward contributions
Who is eligible for Carry Forward Contributions
Find out how much Carry Forward Contributions you have
How to make Carry Forward Contributions
Do you need to inform anyone
Can you use Carry Forward Contributions from years you were not a tax resident
How unused concessional contributions are allocated
Example of Carry Forward Contributions
Ways to keep or reduce your super balance down to below the eligibility threshold
What are Carry Forward Contributions
Also known as ‘catch-up contributions’, unused concessional contributions below the cap from previous years are carried forward, which means that you can use unused concessional contributions from up to the 5 previous years to get more into super and reduce your tax in the current financial year.
Benefits of Carry Forward Contributions
The ‘carry forward contributions’ rule offers some very useful financial planning strategies.
A. Catch up on your super
The most obvious use for this is for people who have not been contributing enough towards their retirement. This allows you to catch up on your retirement funding and still get the (massive) tax deductions available for concessional contributions.
Say you are on the 32% marginal tax rate (including the 2% Medicare levy) and are considering adding $10,000 of your gross salary into super for the tax deductions.
Before contributing, you would get: $10,000 – 32% = $6,800 after tax
After contributing, you get: $10,000 – 15% = $8,500 after tax
You get an extra $1,700 from contributing to super.
Since you would only have received $6,800 after tax, you are getting $1,700/$6,800 = 25% more money added to your retirement savings with concessional contributions.
That 25% becomes:
- 39.34% for those on the 39% marginal tax rate (including the 2% Medicare levy)
- 60.38% for those on the 47% marginal tax rate (including the 2% Medicare levy) *
* If your income and concessional contributions exceed $250,000, div293 may apply.
It’s not hard to see how catch-up contributions help to grow your retirement savings.
And on top of that, you get a low 15% tax on earnings within super, and once you convert to an account-based pension in retirement, earnings are tax-free for decades.
B. Receiving a windfall
If you get a windfall (e.g., inheritance, lotto, sale of a business), you could use that to contribute down to the 16% tax bracket, over potentially several years, to save a significant amount on tax for each of those years.
This is because it doesn’t matter where the cash comes from to use for concessional contributions, only that you have enough taxable income to offset.
So if you have enough unused concessional contributions from previous years, you could contribute down to the point where you have a $45,000* taxable income, and get a very large tax refund. If you still have remaining money from the windfall and remaining unused concessional contributions, you can go and do that each year until either of those has been used up.
* You could contribute further below the point you have a taxable income of $45,000, but below that, you’re on the 18% marginal tax rate (including 2% Medicare levy), and since concessional contributions have 15% tax withdrawn, you are only getting a very small contribution benefit of 3%. You really need to consider if it is worth locking up your money for potentially decades and using up your limited concessional contributions with such a small benefit below that point.
C. Likely to have a higher marginal tax rate (MTR) in the near future
If you are likely to move up to a higher MTR in the near future, you might choose to defer adding additional concessional contributions to save them for reducing more of your tax in the future. In particular, you may want to defer using your concessional contributions that take you down into the 16% marginal MTR if you can get a larger tax deduction by using those concessional contributions in future at a higher MTR.
An example of this would be a parent working part-time and on the 16% MTR. The advantage of adding to super is very low with a saving of 1% (3% with the Medicare levy), so you may decide to save your concessional contributions in the 16% tax bracket for when you go back to full-time work so you can get a larger tax deduction on your concession contributions.
D. Planning for a large capital gain
If you are likely to have a significant capital gain, such as the sale of an investment property, you may wish to defer additional concessional contribution to be used in a year where you expect to have additional taxable income that could result in a higher marginal tax rate being applied.
E. Reducing single-asset risk in your investments outside super
If you have a lot of capital gains built up in single company shareholdings, using the carry-forward rule could be a way to reduce the tax on your capital gain if you wish to sell down and convert it to a more diversified fund. The better-diversified holdings would then be in super and not accessible until you meet a condition of release, so you have to weigh up whether you need access to the money before that.
For example, if you have a capital gain of $100,000 and have held this for over 12 months, your taxable income would be $50,000. If your combined unused concessional contributions from this year and previous years from the carry-forward rule add up to $50,000, using that would avoid having any of your capital gains added to your assessable income. Although you would still be taxed 15% on entry to super.
Who is eligible for Carry Forward Contributions
The only requirement, beyond the standard requirements of concessional contributions, is that your total super balance at 30 June of the previous financial year must be less than $500,000.
If you are approaching or have just reached the $500,000 threshold, you might be able to use contribution spitting with your spouse to keep your balance below the threshold for longer.
Find out how much Carry Forward Contributions you have
To find out how much unused concessional contributions you have, log into the MyGov ATO site and go to the superannuation tab.
If you have not worked for several years (e.g., stay-at-home parent, retiree, new or returning Australian resident), you will have a lot of unused concessional contributions built up.
How to make Carry Forward Contributions
The two ways to add concessional contributions to super are:
- Salary sacrifice — asking your employer to automatically take some of your salary and add it to your regular employer super contribution), and
- Personal contribution — transferring money directly to your super account.
Salary sacrifice is referred to as a pre-tax contribution since it is taken out before it is taxed.
Personal contributions are also referred to as post-tax contributions since you contribute it after tax has been paid.
With the after-tax contribution, you can claim the tax deduction and turn it into a pre-tax contribution (i.e., a concessional contribution). To do this:
- the money must be in your super account before the end of the financial year (most super funds require a week before the end of the financial year for processing), and
- you must lodge an NOI form (Notice Of Intent to claim a tax deduction) with your super fund before you lodge your tax return (or by the end of the following financial year, whichever is earlier), and you will need to receive written acknowledgement from your super fund for the NOI – and you will need that acknowledgement document when you lodge your tax return.
* Note that if you change super funds (called a ‘rollover’) before receiving the NOI acknowledgement, you miss out on the tax deduction, and it remains a non-concessional contribution.
Salary sacrifice has a couple of advantages. Firstly, after you tell your employer and it has been set up, it becomes automated and works away in the background. Secondly, it reduces your PAYG tax immediately. However, you will need to remember to speak to your employer to re-adjust it back once you have used your unused concessional contributions to avoid exceeding the concessional contribution cap from then on. Also, not all employers offer salary sacrifice.
If your employer doesn’t offer salary sacrifice, you can make an after-tax contribution and claim the tax back by lodging an NOI. This also allows you to decide exactly how much to add to super each time and is useful for those on a variable income, as well as for lump sums such as a bonus, inheritance, sale of an asset, or other windfall. While you normally have to wait until your tax return to get your tax savings back, you have the option of submitting a PAYG withholding variation to avoid waiting.
Do you need to inform anyone
Once your concessional contribution cap for the current year is used up, your unused concessional contributions from previous years will be automatically applied and you do not need to inform anyone that you have made contributions that are specifically to be catch-up contributions.
However, if you make personal contributions rather than through salary sacrifice and you want to turn those post-tax/non-concessional contributions into concessional contribution, you need to submit the NOI as mentioned above, and include that in your tax return, but that is not specific to the carry-forward rule.
Can you use Carry Forward Contributions from years you were not a tax resident
There is nothing in the law requiring you to have been a tax resident or taxpayer for the years carrying forward unused concessional contributions.
So new migrants and others who were non-residents for tax purposes are not excluded from using unused concessional contributions from those previous years.
How unused concessional contributions are allocated
Your concessional cap is allocated as follows:
- Any concessional contribution you make up to the concessional cap will be taken from your current year’s concessional cap.
- Above the concessional cap, it will be automatically applied to the oldest unused concessional contributions first.
- Below the concessional cap, only the excess will be added to your unused concessional contributions to be used for up to and including the next 5 future years.
Example of Carry Forward Contributions
Let’s say you had a total super balance of $250,000 on June 30 of the previous financial year and your past concessional contributions were the following:
| Financial Year | Concessional contribution cap |
Used | Unused |
|---|---|---|---|
| 2019/20 | $25,000 | $15,000 | $10,000 |
| 2020/21 | $25,000 | $15,000 | $10,000 |
| 2021/22 | $27,500 | $10,000 | $17,500 |
| 2022/23 | $27,500 | $15,000 | $12,500 |
| 2023/24 | $27,500 | $12,500 | $15,000 |
| Total | $65,000 | ||
Since your total super balance was below $500,000 on June 30 of the previous financial year, you are able to use your unused concessional contributions from the previous five financial years of $65,000.
This is in addition to the current financial year, so this financial year, you could make concessional contributions up to $65,000 + $30,000 = $95,000.
But don’t forget this includes employer and personal contributions for this financial year.
If your employer contributions for this financial year were $15,000, you could make voluntary concessional contributions up to $80,000.
Now, let’s say your taxable income for this financial year was $120,000 and you had $80,000 that you decided you could lock-up until preservation age to boost your retirement nest egg (in exchange for $15,000 worth of free money by way of tax deductions).
While you are eligible to contribute the full $80,000 concessionally, you may want to consider if it is worth contributing over $75,000 since above that, your taxable income will fall below $45,000 into the 18% marginal tax rate (including 2% Medicare levy), and you would only be getting a 3% return (18% less 15% contribution tax) for locking your money up until you reach preservation age. So you may decide to contribute $75,000 this financial year and wait until the next financial year to contribute the last $5,000.
This would allow you to claim a larger tax deduction on the last $5,000.
This would work as follows:
- the first $15,000 goes towards the rest of the current year’s concessional contribution cap
- the next $10,000 goes to the 2019/20 unused concessional contribution cap
- the next $10,000 goes to the 2020/21 unused concessional contribution cap
- the next $17,500 goes to the 2021/22 unused concessional contribution cap
- the next $12,500 goes to the 2022/23 unused concessional contribution cap
- the next $10,000 goes to the 2023/24 unused concessional contribution cap (leaving $5,000)
- in the following year, you would have the remaining $5,000 unused concessional contributions from the 2022/23 financial year (on top of that year’s cap).
The total dollar benefit of doing this:
Using paycalculator.com.au:
A $120,000 taxable income would result in $29,188 tax.
A $45,000 taxable income would result in $4,863 tax.
So by making the $75,000 concessional contribution, you are getting a $24,325 back in personal tax.
However, you are paying 15% contribution tax of $11,250.
This leaves a total tax benefit of $13,225.
On top of this, you could contribute the additional $5,000 in the following year and get another total tax benefit of $850 (or $400 if you contributed it in the first year, bringing your taxable income below $45,00).
So your total tax savings would be $14,075.
Even more benefits
In addition to the above, you could even contribute that $23,325 personal tax savings in future years to get even more free money (if you were not already maxing out your concessional contributions).
And don’t forget that in addition to this:
- ongoing earnings in super are taxed at only 15%
- once you convert to an account-based pension, there is zero tax for decades until you withdraw it.
Spreadsheet by Sam showing the tax savings
Sam (aka BugHunterSam) has a great spreadsheet that you can copy, which helps calculate the tax savings by using some or all of your previously unused concessional contributions.
If you add your salary to B1 and your 2018-2019 carry over amount to E2, B26 will show you the approximate lump sum needed to add to super to use up 2018-2019’s concessional contributions (you could add a little more just to make sure to use it all up). The total tax saved by doing this is in cell B31. I bolded these cells to make it easier to spot them.
– Sam
Ways to keep or reduce your super balance down to below the $500,000 threshold
Contribution splitting allows you to split concession contributions that were made into your own super account and transfer some into your spouse’s account. This can be a great way to keep your super balance below $500,000 to qualify for the carry-forward rule for longer.
If you have reached the age where you can draw out your super, recontributing it to your spouse’s super may result in your super balance falling below the threshold to qualify for the carry forward rule.