By law, your employer must pay a minimum of 9.5% of your earnings into your superannuation account, under the Australian Government rule called the Superannuation Guarantee. This money is held on your behalf by your superannuation fund, until you are eligible to access it, such as when you retire or meet a condition of release. However, it is possible to put more funds into your account via voluntary super contributions.
In this article:
- What are voluntary super contributions?
- How can I make voluntary pre-tax super contributions?
- What are the benefits of salary sacrificing super contributions?
- How can I make voluntary after-tax super contributions?
- Can I make super contributions for my spouse?
- Am I eligible for additional government super contributions?
Due to the complex nature of tax and super contributions, it could be a good idea to seek professional tax advice if you are considering voluntary super contributions.
What are voluntary super contributions?
You could also choose to contribute extra money to your super – which is called ‘making a voluntary super contribution’ – by either:
- a salary sacrifice, which is electing to transfer money from your pre-tax wages into your super account
- directly depositing some of your post-tax earnings into your super account
You may also be able to receive additional super contributions from the Federal Government in some circumstances.
Let’s take a look at how voluntary super contributions and government co-contributions work in Australia.
How can I make voluntary pre-tax super contributions?
You may be able to make pre-tax, or ‘concessional’ contributions to your super by asking your employer to deposit a portion of your weekly, fortnightly or monthly salary directly into your super account instead of your bank account. This type of pre-tax super contribution is known as salary sacrificing.
Do I pay tax on salary-sacrificed voluntary super contributions?
According to the Australian Taxation Office (ATO), salary-sacrificed contributions are not counted as assessable income for tax purposes, which means that they are not subject to pay as you go (PAYG) tax. However, these contributions are still taxed within your super fund, but at a rate of 15%, which is lower than most people’s marginal tax rate, the ATO says. For example, people earning between $45,001 and $120,000 pay a marginal tax rate of 32.5% for each $1 over $45,000 (in addition to $5092 in tax) at the time of writing.
Keep in mind there is a limit on how much of your pre-tax money you can put into your super each year before you start having to pay extra tax. This is known as the ‘concessional contributions cap’ and as of March 2021, the ATO advises that it stands at $25,000 per financial year, which includes the regular super guarantee contributions (9.5% of your base salary) made by your employer. From 1 July, 2021, this cap is due to increase to $27,500.
However, the ATO also notes that since the 2019–20 financial year, if some of your caps from previous years haven’t been used and your total super balance is below $500,000, you may be able to make use of the ‘carry forward’ rule to make concessional contributions that exceed the $25,000 threshold.
What are the benefits of salary sacrificing voluntary super contributions?
The effectiveness of salary sacrificing depends largely on your individual financial situation, so it could be worth obtaining independent financial advice before requesting or agreeing to a salary sacrifice arrangement.
Some potential pros of salary sacrificing for super:
- Salary sacrificing some of your pay into super can be handy because once it’s set up, you don’t have to think about it again unless you want to change the amount being sacrificed or if you want to stop the contributions altogether (though it is a good idea to regularly check your superannuation account to ensure payments are being made and you are comfortable with its performance).
- Salary sacrificing could also be useful if you’re looking to reduce the amount of PAYG tax being applied to your regular wages, according to Moneysmart. Salary sacrificing into super may also be appealing to some first home buyers. According to the ATO, under the First Home Super Saver Scheme, first home buyers could withdraw up to $30,000 (plus earnings) in voluntary super contributions to help them buy their first home. For couples, the amount is $60,000 (plus earnings). This can include salary sacrifice contributions and post-tax contributions. You can contribute up to $15,000 per financial year and withdraw up to 85% of eligible before tax contributions, and 100% of eligible after-tax contributions.
Some potential cons of salary sacrificing for super:
- Salary sacrificed contributions may push you over the concessional (before-tax) contributions cap, which may attract additional tax, according to the ATO. At the time of writing, the cap is $25,000 (due to increase to $27,500 from 1 July, 2021). The marginal tax rate plus an additional excess charge would be applied to excess contributions.
- Once the money is in your superannuation fund, you generally won’t be able to access it until you reach your preservation age. There are some limited ways to potentially access superannuation early, but otherwise it’s part of your retirement nest egg.
How can I make post-tax super contributions?
Post-tax super contributions are made from your take-home pay – that is, the wages you receive after PAYG tax has been applied to your gross salary.
The cap for post-tax, or ‘non-concessional’ contributions is currently $100,000 per person, per financial year, due to rise to $110,000 from 1 July, 2021. If you exceed this cap, you may have to pay extra tax, according to the ATO.
However, you may be able to contribute more than the limit if you make use of the bring-forward rule. This rule, as specified by the ATO, allows those under 65 years old to make up to three years worth of post-tax contributions to their super in a single income year. This means they can potentially put up to $300,000 – or three times the current $100,000 annual non-concessional cap – into their super in one financial year without having to pay extra tax.
If you choose to make non-concessional contributions to your super account, you may be eligible to claim a tax deduction on these contributions, according to the ATO. However, if you claim a deduction, your contributions will change from non-concessional (post-tax) to concessional (pre-tax), which means they are subject to contributions tax at a rate of 15% and will count towards your concessional pre-tax contributions cap.
Can I make super contributions for my spouse?
Another strategy that could help to build your super balance is contribution splitting. Contribution splitting is an agreement between you and your super fund which allows you to make contributions to your spouse or de facto partner’s account. A tax offset may be available if they are earning a low income or not working.
According to the ATO, for you to be eligible for contribution splitting, your spouse needs to be either:
- younger than their preservation age (regardless of whether they’re working or not)
- between their preservation age and 65 and not retired
You or your spouse may be able to claim a tax offset of up to $540 when making contributions into a low-income spouse’s super account, according to the ATO.
The full tax offset may be available for individuals who make super contributions to their spouse’s account if their spouse earns up to $37,000 per annum (including fringe benefits and employer super contributions). The offset then reduces for every dollar your spouse earns over $37,000, before it cuts-off completely once they earn more than $40,000 per annum.
Learn more: Spouse super contributions: How do they work?
Am I eligible for additional government super contributions?
The government may make additional contributions to your super fund if you meet certain requirements.
If you are eligible and have given your tax file number (TFN) to your super fund, the ATO will pay these extra contributions into your fund automatically at tax time. These can include a government super co-contribution and low-income super tax offset.
Government super co-contribution
Specifically, the ATO says you must:
- Earn less than $54,837 a year including assessable income, fringe benefits and reportable super contributions (e.g. employer contributions plus pre-tax contributions).
- Make at least one post-tax contribution to your super.
- Earn 10% or more of your income from eligible employment, running a business, or both.
- Have a total superannuation balance less than the transfer balance cap ($1.6 million at the time of writing, due to increase to $1.7 million as of 1 July, 2021) at the end of the previous financial year.
- Be a permanent resident and aged under 71 years old at the end of the financial year.
- Not have contributed more than your non-concessional contributions cap of $100,000, due to rise to $110,000 from 1 July, 2021).
- Lodge a tax return for the previous financial year.
If you meet the above criteria, the government will contribute 50 cents to your super for every dollar contributed by you, up to a maximum of $500 for the lowest income tier specified under the scheme (at the time of writing).
The co-contribution is paid directly into your super account as a lump sum after your tax return for the financial year has been processed and approved, the ATO says.
Low-income super tax offset
The low-income super tax offset (LISTO) is a government scheme that boosts the superannuation balances of low-income earners. According to the ATO, if you are eligible and earn $37,000 a year or less, at the time of writing, the government will contribute 15% of the total pre-tax contributions made by you or your employer into your super account at tax time. The maximum amount you can receive for a financial year is $500, and the minimum is $10, according to the ATO. You don’t need to do anything to receive a LISTO payment if you are eligible. It will be paid directly into your super fund account once your tax return has been processed.
Growing your super with extra contributions
There are a few ways in which you could boost your super balance by making voluntary superannuation contributions. These could potentially make a difference in the long run when it comes to growing your retirement nest egg. Before you make any pre- or post-tax contributions, it’s important to consider if this approach suits your current financial situation. It may also be worth looking at other options you may have to help boost your super. For further guidance, consider speaking with a financial adviser regarding your situation.
Compare super funds with Canstar
If you’re comparing superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group specified in the introductory text.
Cover image source: Tom Wang (Shutterstock)