Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 198

Catch-up contributions are a tax planning opportunity

As part of the latest superannuation reforms, from 1 July 2018 individuals with a total superannuation balance of less than $500,000 before the beginning of the financial year will be able to make ‘catch-up’ concessional superannuation contributions.

These individuals will be able to access their unused prior years’ concessional contributions cap (that is, the amount by which those contributions are less than $25,000) on a rolling basis for five years and claim a tax deduction for those contributions in the year in which they are made. Any unused concessional contributions cap for the year will expire after five years.

The aim of the measure is to make it easier for people with interrupted work patterns, and with varying capacity to save over periods of time, to accumulate wealth in superannuation and gain access to the same tax concessions as those people who have regular and steady work patterns and income.

Reform offers planning opportunity

It also provides a planning opportunity. By deferring concessional contributions to a year in which an individual’s taxable income is higher, and making them as ‘catch-up’ contributions in the year when they are in the higher tax bracket, they will be able to create a larger tax arbitrage between tax at the super fund level and tax at the personal level. An example illustrates the point.

Dennis is a consultant operating as a sole practitioner. It is June 2019 and his taxable income for the 2019 year will be $80,000. He has not made any superannuation contributions for the year and has a superannuation balance of $300,000. Dennis expects that his taxable income in 2020 will be $165,000 higher because of a net capital gain that he is likely to crystallise due to the disposal of an investment property that he has just put on the market. That is, his taxable income in 2020 will be $245,000.

If Dennis makes a concessional contribution of $25,000 to his super fund in June 2019 and then another $25,000 in 2020 he will create a total tax arbitrage of $12,375. This could be considered a ‘standard’ contribution pattern.

In 2019, his personal taxable income will go from $80,000 to $55,000 and his tax will reduce from $17,547 (not including Medicare levy or small business tax discounts to which he might be entitled) to $9,422. A saving of $8,125 in personal income tax.

His super fund will pay tax of $3,750.

In 2020, his personal taxable income will go from $245,000 to $220,000 and his tax will reduce from $84,782 (not including Medicare levy or small business tax discounts to which he might be entitled) to $73,032. A saving of $11,750 in personal income tax.

His super fund will again pay tax of $3,750.

$8,125 + $11,750 - $3,750 - $3,750 = a $12,375 tax arbitrage.

How catch-ups will work

If Dennis defers the 2019 concessional contribution and makes a catch-up contribution in 2020 (along with the $25,000 allowed for that year) then Dennis will create a tax arbitrage of $16,000.

There is no personal tax saving in 2019. And no tax at the super fund level.

However, in 2020, his taxable income will go from $245,000 to $195,000 and his tax will reduce from $84,782 (not including Medicare levy or small business tax discounts to which he might be entitled) to $61,282. A saving of $23,500 in personal income tax.

His super fund will pay tax of $7,500.

$23,500 – $7,500 = a $16,000 tax arbitrage. $3,625 more than the standard approach of making the maximum $25,000 in each year.

By deferring the superannuation contribution from 2019 until 2020, the tax rate arbitrage goes from 17.5% (32.5% – 15%) to 32% (47% – 15%). The extra 14.5% arbitrage on the $25,000 catch-up concessional contribution amounts to $3,625.

Same amount in super with less tax

Under a 'standard' contribution pattern, over the three years, Dennis will get $75,000 into super with $16,750 in total tax arbitrage.

Under a 'catch-up and reserve' strategy, over two years Dennis will get $75,000 into super with $23,000 in total tax arbitrage.

Denis has created a 30% return, in two years, on his $75,000 contribution.

The strategy will work best where there is a large jump in taxable income from one year to the next resulting in changing tax brackets. Taxpayers would need to know that their taxable income in subsequent years is going to be (much?) higher than the current year.

And, of course, there is the risk that waiting to make catch-up contributions could back-fire if the taxable income drops or the catch-up contributions bring the taxpayer into a lower tax bracket in the catch-up year than they were in in the previous year. Or, indeed, if future government generosity leads to the lowering of the marginal tax rates or expanding of the lower tax brackets or the rules change.

But circumstances could arise where taxpayers will know with a degree of certainty that their taxable income will jump up in a particular year (and then maybe fall again). For example, as in the above scenario where a property is being prepared for sale which will finalise in a later year. Or where a person is party to an option contract which, upon exercise, will result in the disposal of a CGT asset at a price which the person knows will result in a taxable capital gain. Or large dividends might be paid from private companies.

In such circumstances, a person might wish to consider deferring concessional contributions and make them as catch-up contributions in the year when the taxable income increases to maximise the total tax arbitrage. Don’t forget, though, the savings are tied up in super.

 

Stephen Lawrence is a Lecturer, Taxation and Business Law School, UNSW, Chartered Accountant and Member of the International Tax Planning Association. These views are considered an accurate interpretation of regulations at the time of writing but are not made in the context of any investor’s personal circumstances.

  •   20 April 2017
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Super changes, the Budget and 2021 versus 2022

The $1.6 million cap … an unlucky break for the lucky few

Where is superannuation research heading?

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.