Why should you consider making voluntary after-tax superannuation contributions?

Why should you consider making voluntary after-tax superannuation contributions?

In Australia, employers have to contribute 9.5 per cent of your salary into your super account as mandatory Superannuation Guarantee (SG) payments. But with more people choosing to take early retirement or using their super to buy their first house, SG payments may not always be enough to secure a comfortable lifestyle if you have particular retirement goals planned. By choosing to make voluntary contributions, you could increase your super fund exponentially and live the life you always wanted when you retire.

What are after-tax superannuation contributions?

There are two main types of superannuation contributions; concessional and non-concessional contributions. Under concessional contributions, the employer will make SG payments and contributions on your behalf, based on your pre-tax income. Your pre-tax income generally includes salary sacrifice and any other contributions that have been claimed as tax deductions.

On the other hand, non-concessional contributions, also known as voluntary after-tax contributions, are based on your post-tax income or savings. These contributions are not subject to 15 per cent contribution tax as you have already paid tax on your income through concessional contributions. Most individuals use voluntary superannuation contributions as a definitive, simple and fast way to grow their super.

It’s important to note that you can make voluntary after-tax contributions to your super throughout the financial year via a regular transfer, or a one-off payment. However, it’s recommended that before you make any extra contributions, you should take your debt, and current and future financial commitments into account.

What are the after-tax superannuation contributions caps?

To make non-concessional or after-tax contributions, you can choose from two contributions caps:

  • $100,000 per year
  • $300,000 in a rolling three-year period 

These superannuation voluntary contribution limits are applicable as of 2021 and are subject to change every year.

Why should you consider making after-tax superannuation contributions?

1. Grow your super

By simply contributing a small amount every week or month, you can make a significant difference in how much money you’ll have when you retire, especially when you factor in compound interest.

2. Claim tax deduction 

By making additional contributions to your superannuation, in addition to preparing better for your retirement, you can also claim a tax deduction and reduce the amount of income tax you need to pay. However, if you choose to do this, you need to be aware that this will change your non-concessional contributions to concessional. This will make them subject to contribution tax at 15 per cent and considered in your yearly $25,000 cap on before-tax contributions.

3. Get a bonus from the government 

Suppose your yearly income is less than $54,837 and you make after-tax contributions. In that case, the government could consider adding more to your total super balance by providing a co-contribution of up to $500 per year. Then you won’t be eligible for the co-contribution on any amount you claim as a tax deduction.

What should you consider while making after-tax superannuation contributions?

If you’re considering claiming a tax deduction for voluntary after-tax super contributions, there are a couple of restrictions that you should consider first.

  • Make sure you’re aware of all the conditions before claiming.
  • Ensure you provide your super fund with your tax file number to avoid paying any additional tax on your super or having your contributions returned to you.
  • It’s crucial to understand that the Government doesn’t allow you to make any personal or non-concessional contributions to your super after you reach 75. So, make all the contributions you want before to ensure you’re able to live the life you dreamed about after you retire.

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Learn more about superannuation

What are concessional contributions?

Concessional contributions are pre-tax payments into your superannuation account. The payments made by your employer are concessional payments. You can also make concessional contributions with a salary sacrifice.

What are reportable superannuation contributions?

For employees, there are two types of reportable superannuation contributions:

  • Reportable employer super contributions your employer makes for you
  • Personal deductible contributions you make for yourself

What are personal contributions?

A personal contribution is when you make an extra payment into your superannuation account. The difference between personal contributions and salary sacrifices is that the former comes out of your after-tax income, while the latter comes out of your pre-tax income.

What are reportable employer superannuation contributions?

Reportable employer superannuation contributions are special contributions that an employer makes on top of the regular compulsory contributions. One example would be contributions made as part of a salary sacrifice arrangement.

Is superannuation taxed?

Superannuation is taxed. It is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

Can I transfer money from overseas into my superannuation account?

Yes, you can transfer money from overseas into your superannuation account – under certain conditions. First, you must provide your tax file number to your fund. Second, if you are aged between 65 and 74, you must have worked at least 40 hours within 30 consecutive days in a financial year. (Australians under 65 aren’t subject to a work test; Australians aged 75 and over cannot receive contributions to their superannuation account.)

Money transferred from overseas will generally count to both your concessional contributions limit and your non-concessional contributions limit. You will have to pay income tax on the applicable fund earnings component of any money transferred from overseas. You might also be liable for excess contributions tax.

What is salary sacrificing?

A salary sacrifice is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Salary sacrifices come out of your pre-tax income, whereas personal contributions come out of your after-tax income.

Can I buy a house with my superannuation?

First home buyers are the only people who can use their superannuation to buy a property. The federal government has created the First Home Super Saver Scheme to help first home buyers save for a deposit. First home buyers can make voluntary contributions of up to $15,000 per year, and $30,000 in total, to their superannuation account. These contributions are taxed at 15 per cent, along with deemed earnings. Withdrawals are taxed at marginal tax rates minus a tax offset of 30 percentage points.

Voluntary contributions to the First Home Super Saver Scheme are not exempt from the $25,000 annual limit on concessional contributions. So if you pay $15,000 per year into the First Home Super Saver Scheme, you have to make sure that you don’t receive more than $10,000 in superannuation payments from your employer and any salary sacrificing.

What contributions can SMSFs accept?

SMSFs can accept mandated employer contributions from an employer at any time (Funds need an electronic service address to receive the contributions).

However, SMSFs can’t accept contributions from members who don’t have tax file numbers.

Also, they generally can’t accept assets as contributions from members and they generally can’t accept non-mandated contributions for members who are 75 or older.

How does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

How can I increase my superannuation?

You can increase your superannuation through a ‘salary sacrifice’. This is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Like regular superannuation contributions, salary sacrifices are taxed at 15 per cent when they are paid into the fund.

What are government co-contributions?

A government co-contribution is a bonus payment from the federal government into your superannuation account – but it comes with conditions. First, the government will only make a co-contribution if you make a personal contribution. Second, the government will only contribute a maximum of $500. Third, the government will only make co-contributions for people on low and medium incomes. The Australian Taxation Office will calculation whether you’re entitled to a government co-contribution when you lodge your tax return. The size of any co-contribution depends on the size of your personal contribution and income.

When did superannuation start?

Australia’s modern superannuation system – in which employers make compulsory contributions to their employees – started in 1992. However, before that, there were various restricted superannuation schemes applying to certain employees in certain industries. The very first superannuation scheme was introduced in the 19th century.

How much extra superannuation can I add to my fund?

There is an annual limit of $25,000 for concessional contributions – that is, money paid by your employer and extra money you pay into your account through salary sacrificing. There is also a limit on non-concessional contributions. Australians aged between 65 and 74 have a limit of $100,000 per year. Australians aged under 65 have a limit of $300,000 every three years.