Each year you are entitled to a tax deduction for a certain amount of superannuation contributions. The tax deduction is available to your employer if they contribute on your behalf but it can also be available to you personally when you make extra contributions to super.
The amount that you can claim as a tax deduction is limited to what is known as your Concessional Contributions Cap. There is a standard Cap of $25,000, though that is increasing to $27,500 on 1st July 2021. There are certain people that can add amounts that haven’t been used in previous years to this cap amount.
If you go over your Concessional Contributions Cap, the excess contributions are merely added to your taxable income so you don’t get any tax benefits out of the contribution.
For example, let’s say your Concessional Contributions Cap is $25,000 but you make $35,000 in concessional contributions. The extra $10,000 will be added to your taxable income but you will receive a credit for the $1,500 in contributions tax paid by the super fund.
But there is a little known trick to allow you to “bring forward” a tax deduction for your concessional contributions. This “hack” is commonly known as a Contributions Reserving Strategy and it has been approved by the Tax Office. If done correctly it allows you to take some of next year’s Concessional Contributions Cap and bring it into this financial year. But it must be done correctly and if you take advantage of it, you need to lodge a specific form with the Tax Office to let them know. The ATO will almost certainly audit what you have done.
It is also important to note that it is really only achievable to do this strategy with a Self Managed Superannuation Fund. It is also important to note that you are merely bringing forward your contribution (using it this year) and that you won’t be able to use that amount next year, so careful planning is also needed.
This type of strategy is used by people who will have an unusually higher taxable income this year than they will next year. So, for example, you might have a large capital gain this year or you might be retiring and have no taxable income next year.
Leaving it until the new financial year to discuss this strategy is far too late, and it absolutely cannot be done after late June. It is essential that you talk to us if you feel next year’s taxable income will be a lot lower than this year