Doubling your super contribution tax deductions – but carefully

There’s a little known strategy that can help you make extra super contributions in June and get a tax deduction for them even if you’ve already used up this year’s cap. But it needs to be handled with care.

These days, virtually anyone under 67 can make a super contribution and claim a tax deduction for it. The catch is that there’s a cap on the amount (currently $27,500) and contributions made by an employer are also counted towards this cap. So someone who is working and earning (say) $100,000 from an employer will have already used up $11,000 of this cap on their compulsory super contributions alone. That doesn’t leave a lot of scope for large tax deductions.

People who had less than $500,000 in super at 30 June 2023 can look back over the last 5 years (back to 2018/19) and see whether they have any of these caps leftover from previous years. If they do, they can make a bigger contribution this year (and claim a bigger tax deduction).

But that’s no good for people with larger balances – at first glance they’re stuck with a cap of $27,500 including any employer contributions.

But in fact there’s one extra option for people with SMSFs – and for once this really is something that’s only available to people with SMSFs.

That is, if they make extra contributions in June (ie, the last month of the financial year) they can actually use up the next year’s cap early. This doesn’t give them an extra cap, it just allows them to use the subsequent year’s cap this year instead of waiting.

For example, Chris had $800,000 in super at 30 June 2023 – so he’s not allowed to look backwards and use old caps back to 2018/19. His super fund received $11,000 in employer contributions for him during 2023/24. He can make extra (personal) contributions of $16,500 (ie, adding up to $27,500) any time during 2023/24 and claim a tax deduction for them in his 2023/24 tax return.

But he could also – if he wanted – make yet another contribution (let’s say $15,000) in June 2024 and do what’s called a “contribution deferral”. What that means is that the trustee of his SMSF deliberately holds off adding this amount to Chris’s super balance (it’s held “in limbo”) until at least 1 July 2024. The reason this step is important is that contributions aren’t checked against any caps until they are actually added to the member’s super account. In Chris’s case, if they’re not added to his account until the new financial year, they will count towards his 2024/25 cap not 2023/24. But contributions are tax deductible in the year they’re actually received by the fund (in this case 2023/24).

In other words, using this strategy lets Chris effectively claim a tax deduction early – he can make sure the deduction is available for his 2023/24 tax return but not go over his 2023/24 contribution cap.

So why doesn’t everyone do this?

Well it’s not particularly useful for people who are likely to use their next year’s cap anyway. Take Chris – if he claims an extra tax deduction this year, he will have less cap to use next year. Unless he repeats this process every year, he will end up paying less tax this year (thanks to his extra tax deduction) but more tax next year.

But it can be extremely useful. Again – using Chris as an example, imagine he had just sold an investment property and realized a very large capital gain. So large, in fact, that he’ll be a top marginal tax rate payer in 2023/24 (with total taxable income of $220,000) but unlikely to have so much taxable income in the future. That means a tax deduction in 2023/24 is worth a lot of money to him. Every $1 tax deduction he can take saves him 32c (the 47c tax he saves in his personal tax return less the 15c tax his super fund will pay).

But tax deductions won’t be so useful next year when his income has settled back to normal levels ($100,000 pa). A $1 tax deduction in 2024/25 would only be worth around 17c (he’ll save 32c personally and his super fund will pay 15c tax on the contribution).

Under that scenario, Chris might be perfectly happy to use up as much as possible of next year’s cap in 2023/24 by using this “contribution deferral” strategy. Of course, he’d have to be careful to leave enough of his cap available for the compulsory contributions his employer will make next year (say around $11,500) unless he was happy to have those treated as being “in excess” of his cap. (And in fact, in Chris’s case, even that might be worth doing given the big difference in his tax rates – but that’s an article for another time.)

The strategy can also be particularly useful for people in their final year of work who won’t need tax deductions at all the following year. For example, Taylor (64) earns $200,000 pa and has been regularly salary sacrificing – he used up his full 2023/24 cap before he retired in April 2024. In future, his income will be his tax free super pension. He could make extra contributions in June 2024 to use his entire cap for 2024/25. An important side note here – don’t forget that the cap on these types of contributions (known as “concessional contributions”) is going up to $30,000 next year. Since this strategy is all about using next year’s cap a year early, Taylor’s extra contribution would be $30,000 not $27,500.

But there are important rules to follow.

Number one is that contributions have to be added to a member’s super account within a reasonably short timeframe – the 28^th of the following month. That’s why Chris and Taylor’s extra contributions had to be made in June. They can be held in limbo until 28 July but no later. Contributions made in May 2024 could only be held back until 28 June 2024 – so they would count towards the 2023/24 contribution caps, mucking up the strategy.

There’s paperwork to do and reporting to the ATO does get a bit messy – it’s important to make sure your SMSF’s accountant is all over how this strategy works and files the right forms at the right times as well as putting the right minutes in place for the trustee.

Another is that the contribution using next year’s cap (that will be deferred and not allocated to the member’s account until the following year) should be made quite separately to any other concessional contributions. In Chris’s case, he could make two completely separate deposits – one (at any time during the year) for $16,500 to use up the rest of his 2023/24 cap and a separate one (in June 2024) of (say) $15,000 that will be deferred and allocated to his member account in July. Or he could make multiple smaller deposits – the key would be not contributing the full $31,500 all together.

This strategy can make a lot of difference but has to be implemented carefully – it pays to make sure your adviser and accountant are SMSF experts before implementing it.

(As an aside, making personal contributions and claiming a tax deduction for them is actually something that’s available to people who are between 67 and 75 but only if they meet a work test. So I’ve focused on those under 67 in this article.)