Understanding Superannuation Contributions

Walbrook Wealth ManagementSeptember 20, 2020

This fact sheet provides additional information to help with understanding the investment, tax and other financial planning concepts that we have discussed with you or included in your Statement of Advice.

Please contact your adviser if there is any aspect on which you need further information or clarification.

Understanding superannuation contributions

You may contribute to your superannuation balance, or that of your spouse, subject to limits on annual contributions, age and work status. Limits exist due to the tax benefits that superannuation balances enjoy.

There are two main types of contributions:

  • Concessional contributions, which are made by you or your employer and on which the contributor claims a tax deduction (before-tax contributions)
  • Non-concessional contributions, which are made by you and on which you do not claim a tax deduction (after-tax contributions)

Concessional contributions

The government offers generous tax concessions to encourage you to save for your retirement.

Concessional contributions are tax-deductible contributions made to superannuation funds which comply with government regulations. If eligible, the contributor can use concessional contributions to reduce income tax payable on income or net capital gains.

Concessional contributions derive their name from the lower rate of tax that is applied when compared with the company tax rate and personal marginal tax rates.

Generally, concessional contributions are subject to a 15% contribution tax payable by the superannuation fund. Low-income earners may receive a tax offset.

Legislation limits the concessional contributions which can be made for individuals by an employer, or by an eligible person for themselves, in any one financial year. You can find current contribution cap levels here.

Unused concessional contribution capacity can be carried forward for five years, commencing 1 July 2018. To be eligible to use the carry-forward rule in a financial year, your total superannuation balance must have been below $500,000 at the end of the preceding financial year.

Employer superannuation contributions

The Superannuation Guarantee (SG) contributions paid by your employer are concessional contributions, as are salary sacrifice contributions that your employer deducts from your pre-tax salary.

Superannuation guarantee (SG)

The government introduced the SG system in the early 1990s.

Employers are required to pay a percentage of an employee's earnings to the employee's superannuation fund, at least quarterly. You can find current SG rates here.

The government caps the level of earnings on which the employer must base the contribution, limiting the amount of the required contribution, and employers are not required to contribute for employees earning under a certain amount per month.

Some employers elect to make contributions above the legislated amounts, as part of their overall employee benefits offering. Because these additional contributions also count towards the concessional contribution cap, high-income earners may wish to negotiate with their employer to take these amounts as salary.

Salary sacrifice

An employee may ask their employer to direct part of their pre-tax salary to superannuation, rather than have it paid to them as salary, known as salary sacrifice. The contributions are known as salary sacrifice contributions.

Salary sacrifice contributions are subject to 15% tax, which is generally a much lower rate than an individual's marginal tax rate, helping reduce their tax liability while building wealth for their retirement. While an individual who earns more than $250,000 per annum has their contributions taxed at 30%, this still provides a tax saving.

Personal concessional contributions

You are not limited to making concessional contributions via your employer. Any eligible person can make a personal concessional contribution to their superannuation fund, and claim a tax deduction on their personal tax return. A disadvantage of this approach, when compared with salary sacrifice, is having to fund your contributions from after-tax salary, then wait until the end of the financial year to lodge your tax return and receive your refund.

To determine your eligibility to make a concessional contribution, consult with your financial adviser or tax professional.

Non-concessional contributions

Non-concessional contributions are superannuation contributions on which you have not claimed a tax deduction.

Examples of non-concessional contributions, other than contributions made personally from your after-tax savings, include spouse contributions and contributions made to receive the government co-contribution.

These contributions may attract benefits such as:

  • Government co-contributions
  • Spouse contribution tax offsets
  • Tax concessions in retirement and on death

As with concessional contributions, non-concessional contributions are subject to a cap. The legislation sets the non-concessional limit at four times the concessional contribution limit.

The amount allowed under the annual cap can be 'brought-forward' three years, as long as the individual has not triggered the 'bring-forward' rule in the previous two years and their total superannuation balance was below $1,400,000 at the end of the last financial year. You can find further information on the caps and treatment where the total superannuation balance is above $1,400,000 here.

Government co-contributions

By making a non-concessional superannuation contribution of $1,000, you may be eligible for a co-contribution from the government.

You can find the eligibility requirements here. Once eligible, the income test determines the amount of co-contribution you may receive.

You do not need to apply for the government co-contribution. The ATO automatically calculates whether you are entitled to it, using information from your superannuation fund and your tax return.

The government co-contribution is a non-concessional contribution but does not count towards the non-concessional contribution limit.

Spouse contributions

An individual may make non-concessional contributions on behalf of their spouse as long as the spouse is under age 70.

From the ages of 65 - 70, the receiving spouse must work at least 40 hours in 30 consecutive days in the financial year of contribution. The non-concessional contribution limit applies to the receiving spouse.

Once an individual makes a spouse contribution, it is "preserved", meaning the receiving spouse cannot withdraw it until they meet a condition of release (e.g. turning 65 or retiring between 55 and 65).

If you make a contribution to superannuation on behalf of your low- income earning spouse, you may be eligible for a tax offset within certain limits. Your spouse qualifies as a 'low-income earner' if the total of their assessable income, reportable fringe benefits and reportable employer contributions (RESC) is less than $40,000 per annum.

A legal or a de facto husband or wife meets the definition of a spouse under the legislation. To claim the rebate, the partners must be Australian residents and living together. The contributing spouse must not claim the contributions as a tax deduction.

The maximum rebate is 18% of eligible spouse contributions, up to a maximum rebate of $540 on contributions of $3,000. The maximum rebate applies where the recipient spouse has a total income of less than $40,000 per annum.

What happens if you exceed the contribution caps

Extra superannuation contributions are not always welcome as breaching contribution limits can result in substantial penalties.

Exceeding the contribution limits is not uncommon, as many people don't realise that they must include their employer superannuation guarantee contributions. Corporate life insurance policies paid by employer superannuation contributions can also pose a problem.

Concessional contributions over the annual cap are taxed at your marginal tax rate plus Medicare, after allowing for the ordinary 15% contributions tax, and a penalty interest charge is also applied. Additionally, any excess that remains in the superannuation fund will count towards the non-concessional contributions limit.

The penalties for exceeding the non-concessional contributions are more significant, considering after-tax income is typically the funding source. The ATO will give you the option of having the excess contribution amount plus a notional earnings amount refunded to you, and any excess non-concessional contributions that remain in superannuation incur tax at 47%.

Given the potential consequences of breaching the contribution limits, it is essential to speak to your financial adviser if you are unsure about your contribution amounts.

Contributions & balance components

There are two key components of your superannuation balance:

  • The tax-free component of your superannuation balance typically derives from the non-concessional contributions that you have made.
  • The taxable component is the total value of your superannuation, less the tax-free balance. The taxable part typically consists of concessional contributions, made by you or your employer, as well as investment earnings.

The taxable component can be split further, into:

  • a taxed element, which has incurred contributions and earnings tax.
  • an untaxed element, which is not as common but arises from public sector superannuation schemes and insurance benefits that have not incurred any tax.

Due to differing tax treatments, before consolidating or making significant contributions to your superannuation balances, you should speak to your financial adviser.

Important Information

Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; AFSL No. 512465). Barbacane Advisors Pty Ltd is authorised to provide financial services and advice. This post is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or needs, unless expressly indicated otherwise. You should consider whether the information is suitable for your circumstances and where uncertain, seek further professional advice. The author has based this communication on information from sources believed to be reliable at the time of its preparation. Despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice, and we are not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, we accept no liability for any loss or damage as a result of any reliance on this information.

Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; Australian Financial Services Licence No. 512465). Walbrook Wealth Management (Credit Representative Number 534783) is authorised under Australian Credit Licence 389328.

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