Caps on and caps off

By Colin Lewis,
Head of Technical Services,
Fitzpatricks Private Wealth
September 2018

You’ve heard it time and time again – start putting something aside when you’re young and you’ll end up with more at retirement.  Unfortunately, many people only come to realise this or are only in a financial position to do something about it when they start thinking about retirement.

It’s about the power of compound interest.

Albert Einstein is purported to have said that compound interest is the eighth wonder of the world.  Whether or not he said it, there is no doubting the incredible growth potential of an investment when you earn ‘interest on your interest’ over a long period of time.

Most see the merit of following such a strategy to reap the rewards, provided they’ve got the financial capacity to do so.

The problem is that most people face competing financial commitments.  Especially young people and families with potentially HECS-HELP debts, mortgages, kid’s education expenses, etc.  So, putting money aside that cannot be touched for say 30 years is, understandably, the last thing they can afford to do.

It’s long been held that you need a contribution rate of 15 percent of salary over a 40-year working life to have any chance of a reasonable benefit come retirement.  So, the current compulsory employer Superannuation Guarantee (SG) contribution rate of 9.5 percent (rising to 12 percent by 2025-26) isn’t going to cut it!

So even doing the little things like making a small super contribution where eligible for the Government co-contribution is a great start – and the best return on investment going around.

Understandably, the system is now about capping how much you can get into it given that the limit on how much you could take out on a concessionally taxed basis was abolished 11 years ago.

Thus, to have measures in the superannuation system that help people with limited retirement savings to catch up or top up is welcome and sensible!

However, these positive features of the system potentially exclude many who may have planned well in advance for their retirement.

Those who thought they’d ‘done the right thing’ and postponed current consumption and sacrificed lifestyle for future consumption – the adage of putting something away for a rainy day – may be scratching their heads to find that unlike other, less prepared people, they now miss out on topping up their super.

Cases in point, the new unused concessional contributions (CCs) cap catch up measure and the proposed change to the work test.

Unused concessional (pre-tax) contributions

From 1 July this year, you may be able to carry forward any unused CCs cap amount.  Any unused amount can be carried forward on a rolling five-year basis.  However, the problem is that you can only do this if your total superannuation balance (TSB) – the total amount you have in the superannuation system – is less than $500,000 at 30 June of the previous year.

So, if you don’t use your entire CCs cap amount in one year, you may be able to use it in future, but it only relates to any unused CCs cap amount starting from this year – any unused amount from previous years has been lost.

For example, if you or your employer only make CCs of, say, $20,000 in 2018-19 – a shortfall of $5,000 from the $25,000 CCs cap – you can carry forward $5,000.  Then in 2019-20 you or your employer, if you choose, could make CCs up to $30,000, or alternatively you could carry the $5,000 forward up until 2023-24, provided your TSB is under $500,000.

This measure was implemented primarily to help people temporarily off work, say to raise children, to top up their super once they re-enter the workforce.  However, it also helps others in a range of circumstances including someone wishing to minimise a capital gains tax liability using a personal deductible contribution, or those embarking on a business venture, e.g. medical practitioners starting out in practice, or someone who’s gone through a relationship breakdown trying to get back on their feet, where there isn’t the cashflow to support super contributions.  The ability to catch up means that once they’re up and running and have the income/cashflow they may be able to make CCs of up to $150,000 in one year (before allowing for indexation of the CCs cap).

Carrying forward unused amounts into future years may reduce the tax effectiveness of those contributions given the latest reduction in personal tax rates or could increase their tax efficiency if you move over time into a higher tax bracket.

Change to the work test

Anyone under age 65 can contribute to super, regardless of their work status.  However, if you’re aged 65 to 74 you must meet the ‘work test’ to be eligible to contribute, otherwise only compulsory employer contributions can be made, i.e. SG or award contributions.  The test requires you to have been gainfully employed for at least 40 hours over 30 consecutive days during the financial year.  Once you’ve done this, you can contribute anytime during that tax year.

In this year’s Federal Budget, the government announced a change to this work test to give people an extra year to contribute to super.

It is proposed that from 1 July next year, people aged 65 to 74 may be able to make voluntary contributions for 12 months from the end of the financial year in which they last met the work test.  In other words, voluntary contributions may be permitted in the first year you fail to meet the test.  However, you’ll only be able to do this where your TSB is below $300,000.

Both these measures are commendable, but restricting availability based on your TSB is a shortcoming and appears to be overkill.  The amount that can be moved from the taxable accumulation phase into the tax-free retirement phase is already subject to a $1.6 million transfer balance cap and non-concessional contributions are conditional on a $1.6 million TSB test and limited to $100,000 from age 65.

To take advantage of the eighth wonder for the world – compound interest – funds need to be invested for longer.  Incentives should be provided so that people help fund their own retirement earlier and take pressure off the public purse.  Why have a framework that rewards only those who wait until the last minute?



Stay informed and on top of your financial game plan.


Visit our library of resources containing educational articles and videos to help you live a great life and to keep you updated on financial matters.


Our Private Wealth Program gives you a financial road map, including action plan to achieve your three and 10 year goals.