Working Aussies are expected to make regular superannuation contributions before retirement and for many, the process is taken care of by employers through the Superannuation Guarantee (SG).
Whether or not super contributions are taxed often depends on whether tax has already been taken out of them. For example, if you choose to put money into super after income tax has already been taken out, it is considered an “after tax” or “non-concessional” contribution. However, if the money comes straight out of your salary before tax is taken out, it’s considered a “pre tax” or “concessional” contribution.
Concessional contributions often attract a lower tax rate than income tax at 15 per cent. On the other hand, because non-concessional contributions are from your after-tax income they are not taxed a second time.
How are pre-tax superannuation contributions taxed?
For most earners, concessional, or pre-tax super contributions, tend to be taxed at 15 per cent as long as you don’t contribute more than $25,000. Concessional contributions can include:
- Contributions made by your employers like SG contributions and those made through a salary sacrificing arrangement
- Contributions you make which you plan to claim a tax deduction on.
Concessional contribution caps reset on June 30, which is the last day of the financial year. If the contributions received in your super fund by June 30 crosses the upper limit of $25,000, the excess amount will be taxed at the same marginal rate as your income. If you need to pay tax because your concessional contributions are over the specified limit, check if you can use your super funds to do so.
High-income earners may have to pay an additional 15 per cent under Division 293 if their wages and super contributions add up to over $250,000. Consider checking if you need to pay this Division 293 tax as well.
How are post-tax superannuation contributions taxed?
There are a few contributions that fall into the “after tax” category, such as contributing to super without claiming a tax deduction or having a spouse contribute to your fund. These are considered non-concessional earnings as your income has already been taxed at the marginal rate.
However, there is a maximum amount of $1.6 million you can have in your retirement account. You could risk paying a hefty tax if you don’t check the available non-concessional contribution limit and stay beneath it. As per the ATO, your non-concessional contributions cap reduces to zero if your super fund balance was at least $1.6 million at the end of the previous financial year. Since your non-concessional contributions can include your spouse’s contributions to your super fund, they’ll need to know about your super fund balance as well.
However, if you are a member of a defined benefit super fund, you may have to deposit non-concessional contributions even if your super fund balance is over $1.6 million to comply with workplace agreements. Also, since you won’t be able to withdraw defined benefits, you’ll have to pay tax on the excess contribution from your pocket. Consider speaking to your super fund or a financial advisor if this affects you.
Those with a super fund balance under $1.6 million may deposit as much as $100,000 annually in non-concessional contributions. Remember that exceeding this limit can mean paying tax at a 47 per cent rate. If you are under 65 and not at risk of crossing the super fund balance limit even after making this maximum contribution, you may qualify for a ‘bring forward’ arrangement. Such an arrangement allows you to make a much higher non-concessional super contribution and account for that in the next year or two. Note that if your super fund has received any concessional contributions above the $25,000 cap, the excess amount is a non-concessional contribution.