Catch-up Contributions: are they for you?

This article considers the application of the “catch-up” contribution provisions – when they can be made? How much can be made? And what happens if an excess of “catch up” contributions are made?

Making “catch-up” contributions is an effective strategy to increase your superannuation savings.

Finally, the article considers the interaction between catch-up contributions, bring forward contributions and downsizer contributions.

What are “concessional contributions”?

Well, there is a bit of explaining required. In broad terms, all employer contributions made for you and all of your own contributions in respect of which you have received a tax deduction are treated as concessional contributions. The term “concessional” refers to the tax treatment given to the maker of the contribution. (And not to the tax treatment they receive in the hands of the super fund.)

In respect of each financial year, the ATO will determine the aggregate of all of your concessional contributions. If the aggregate does not exceed a specified limit (called the concessional contributions cap) these contributions will be taxed at 15% by being included in the assessable income of the superannuation fund.

To the extent the aggregate exceeds the specified limit, the economic benefit of the tax deduction claimed in respect of the contributions will, effectively, be reversed and the excess amount will be counted as a non-concessional contribution.

This reversal is achieved by the following process. The amount of the excess will automatically be included in your assessable income for the financial year in which the excess arose. You will be liable for tax at your marginal tax rate on the excess amount, but will be allowed a tax credit of 15% of the amount of the excess (as these contributions have already been subject to tax at 15% by being included in the assessable income of the superannuation fund). By these actions the tax benefit of making excess concessional contributions has been reversed. The excess amount is then treated as a non-concessional contribution.

The concessional contribution cap is currently $27,500 for the 2023/24 financial year and will be $30,000 for the 2024/25 financial year. The cap is not an absolute limit on the amount of concessional contributions which can be made in a financial year, but a dividing line between separating contributions which have one tax treatment as against those contributions which have a different (less favourable) tax treatment.

Well that’s fine, but what are “catch-up contributions”?

Well to know catch-up contributions you must first know concessional contributions. And that life goal has now been achieved (almost).

The current version of the concessional contribution cap first applied from 1 July 2017 when it was set at $25,000. Indexation since 1 July 2017 has increased the cap to the current rate of $27,500. A flat dollar universal cap suffers from two significant defects. First, the cap makes no allowance for a taxpayer’s age related ability to make superannuation contributions. Second, if the cap for a financial year is not fully used, the unused portion is lost.

To place the first defect in perspective, the concessional contribution cap for 2007/08 financial year was $50,000 if under age 50 and $100,000 if aged 50 or more!! This defect remains.

The second defect has been partially ameliorated. It is now possible to carry forward the unused portion of the concessional contribution cap for 5 tax years. If the unused portion of the cap for 2022/23 tax year was $9,500 then this amount could be carried forward to the 2023/24 tax year. Consequently the concessional contribution cap for 2023/24 would be $37,000 – that is $27,500 plus the carry forward of $9,500.

Catch-up contributions are additional concessional contributions made to take advantage of previous tax years’ unused concessional contributions cap.

If your actual concessional contribution cap was $39,000 for the 2023/24 tax year (due to the carry forward of $9,500) then you could make $36,000 of concessional contributions and the entire $36,000 would be treated as concessional contributions. Without the carry forward, only the first $27,500 would be treated as concessional contributions with the balance of $8,500 treated as excess concessional contributions.

In which situations can I use “catch-up contributions”?

Catch-up contributions could be used in the following situations

• If you are the in position where your employer can make a significant salary sacrifice contribution.
• If you have recently sold your family home and have funds to invest in superannuation from the sale proceeds. If the sale occurred on or after you had attained age 55 then you may be able to make both catch-up contributions and a downsizer contribution.
• If you have recently sold an investment property – then the sale proceeds could be applied in the making of catch-up contributions.
• If you are over age 60 and are entitled to withdraw your superannuation benefit – you could gift an amount to your spouse for your spouse to make their own catch up contributions.

What are the conditions for making catch-up contributions?

There are three conditions which must be satisfied before you can make catch-up contributions.

The first is that your total superannuation balance (essentially the total amount you have in the superannuation system) must be less than $500,000 just before the start of the tax year in which you propose to make the catch up contribution. In fact, the total superannuation balance could be $499,999 and you would still be entitled to make catch up contributions.

The second condition is that to make catch up contributions in respect of a tax year you must first fully exhaust the normal concessional contributions cap applying to that tax year. So, to make catch-up contributions in respect of the 2023/24 tax year, you must make concessional contributions equal to $27,500. It is not possible to first exhaust the unused carry forward before exhausting the current cap.

The third restriction is imposed by the SIS Contribution Acceptance Rules. As a general statement, contributions cannot be made after age 75 (or more correctly before the end of a grace period being the 28 days after the month in which age 75 is attained). There are exceptions for super guarantee contributions and contributions required to be made by an employer by reason of an industrial award as well as downsizer contributions.

When can they be made?

Taking 2023/24 as the year in which you propose to make a catch up contribution, in 2023/24 you must:

• have a total superannuation balance as at 30 June 2023 of less than $500,000;
• have already exhausted your concessional contribution cap for 2023/24 by having concessional contributions (employer and your own) of $27,500 made by you or for you;
• have unused concession contribution cap space from any of the following tax years – 2018/19, 2019/20, 2020/21, 2021/22 or 2022/23.

How much can be made?

Don’t worry, the ATO can tell you the total unused catch up contribution amount – go to the MyGov site and login. Then go to the linked ATO site.

What happens if there is an excess of “catch up contributions”

There is no real issue. The excess will be identified by the ATO and the excess amount will be notified to you. The tax deduction for the excess amount will be reversed by including the excess in your tax return for 2024/25 and you will have to pay tax (less 15% tax offset) on the excess amount.

You can lease the excess amount in the super system or take out the excess amount (and attributed earnings) by giving the ATO a release authority. The excess amount (after first paying any tax debt) will eventually be paid to you.

What happens if I want to use the “bring forward” of non-concessional contributions in 2024/25 tax year?

You must ensure that you do not trigger “the bring forward” in 2024/25 by exceeding the $110,000 non-concessional contributions cap applying to the 2023/24 tax year.

The “bring forward” will be triggered in 2023/24 if you make excess catch up contributions.
So, if you do make excess catch up contributions in 2023/24 –simply use the release authority to release the excess amount from the super system. If the excess amount is released, it will not be counted as non-concessional contributions in respect of the 2023/24 tax year and you will not exceed the $110,000 non-concessional contributions cap which applies to the 2023/24 financial year.