Contributing to a superannuation or super fund is the Aussie way of setting aside money for life after retirement. Employers are required by law to contribute on behalf of their employees.
To boost your retirement funds, you can check if your employer will let you make an additional super contribution from your before-tax salary, also known as making a salary sacrifice. You may qualify for a tax deduction on this contribution if you don’t exceed the concessional contributions cap for the year, or if your previous years’ contributions were lower than the maximum.
How does the concessional contribution cap affect salary-sacrificed super contributions?
According to the Australian Taxation Office (ATO), three kinds of super contributions can qualify for a concessional or lower tax rate, which is currently 15 per cent. These contributions include:
the superannuation guarantee or compulsory super contribution made by your employer which must amount to at least 10 per cent of your salary before tax.
Contributions you make through a salary-sacrificing arrangement with your employer.
Contributions your spouse makes to your super fund.
To qualify for the lower tax rate, the sum of these contributions should not exceed the concessional contributions cap set at $27,500 by the Australian Tax Office (ATO) for the financial year, which started on 1 July 2021. Note that this cap was earlier stipulated as $25,000, from 1 July 2017 to 30 June 2021, and that the ATO allows you to carry forward the “unused cap”, meaning the further concessional contribution you could have made but did not, perhaps due to a period of unemployment.
Accordingly, you can calculate the cap available to you based on the contributions made in the last five financial years, including the current year. However, if your total super fund balance at the end of the immediately previous financial year exceeded $500,000, you would not qualify for carrying forward the unused balance for the current year.
Suppose your concessional contributions for 2020-2021 totalled $20,000 and your super fund balance on 30 June 2021 was $400,000. Your concessional contributions cap for 2021-2022 would amount to $32,500, the sum of the current year cap of $27,500 and the carried-forward cap of $5,000 from 2021-2022. You should also remember that concessional contributions above the cap are considered non-concessional contributions and taxed at a higher rate.
What are the pros and cons of salary-sacrificed super contributions?
A salary-sacrificing arrangement for contributing to your super fund lowers the portion of your income taxed at the marginal rate, thus reducing your tax burden. If you keep track of concessional contributions to your super fund, you may also benefit from the tax deduction on the super contribution. Most significantly, you would add to your retirement funds in the process, ensuring a larger sum available for you in your old age.
However, you should ensure that your employer is not claiming a part of your salary-sacrificed contribution as their super guarantee contribution, as they deduct both amounts from your salary and pay the total into your super fund. Further, you have to keep track of your past super contributions - whether through salary sacrifices or personal deposits - and make sure you don’t end up paying extra tax on your super contributions. Also, as the tax is calculated on the amount received in your super fund by the contribution deadlines, you could end up not using your entire cap if the contribution is not deposited by your employer in time.