In this article:
- How do super contributions work?
- What are concessional superannuation contributions?
- What are non-concessional superannuation contributions?
- Can I contribute $300,000 to my superannuation?
- What happens if I contribute more than the limit into my superannuation?
How do super contributions work?
For eligible employees, compulsory super contributions are made by your employer in addition to your income. Currently, this rate is 10% of your base salary, following an increase from 9.5% that came into effect on 1 July 2021. These contributions are intended to bolster retirement savings and replace or supplement the Age Pension for your retirement. This is known as the Superannuation Guarantee.
You may also choose to make additional contributions from your pre-tax or after-tax income or savings to help maximise your nest egg. Limits to these contributions, known as caps, are set by the Australian Taxation Office (ATO). They are reviewed annually and indexed periodically based on average earnings in Australia. If you exceed your super caps, you may need to pay extra tax.
There will be a lot of super changes for consumers to get their heads around this year. Key takeaway – take responsibility for choosing a fund that works for you. Here’s my wrap up of the big changes set to take effect in 2021. https://t.co/zzm3cQgUZi #superannuation #retirement
— Ellie McLachlan (@E_McLachlan) January 7, 2021
What are concessional superannuation contributions?
Concessional contributions are made out of your pre-tax income. Commonly, these are the contributions your employer makes based on requirements for the superannuation guarantee. Other types of concessional super contributions include voluntary contributions such as salary sacrificing, as well as any personal contributions you make and claim a tax deduction for. Once in your super fund(s), these contributions are taxed at 15%, according to the ATO.
What is the concessional contribution cap?
- Current concessional contribution cap = $27,500 each financial year
From 1 July 2021, the limit on your concessional contributions increase from $25,000 to $27,500 each financial year, regardless of your age. The new cap is indexed to average weekly ordinary time earnings (AWOTE), rounded to the nearest $2,500, so the cap has the potential to change again in the future.
What are ‘carry forward’ concessional contributions?
If you don’t use all of your concessional contribution cap in a given year, you can ‘carry forward’ the unused portion to increase the amount you can pay in the next year. According to the ATO, you can keep doing this for up to five years, at which point the oldest carry-forward amount will expire. However, you should note that you can only benefit from this if your super balance is less than $500,000 at the end of the previous financial year. Bear in mind that the carry-forward rule has only existed since the 2019–20 financial year, so the earliest year you would be able to carry forward from would be 2018–19.
→ Read more: What are concessional contributions?
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 above.
What are non-concessional superannuation contributions?
You can also make non-concessional contributions into your superannuation, which are contributions from your after-tax income. These include any contributions made from your savings and from your spouse, as well as after-tax contributions by your employer on your behalf. Non-concessional contributions are not taxed in your super fund, according to the ATO.
What is the non-concessional contribution cap?
- Current non-concessional contributions cap = $110,000 each financial year
From 1 July, 2021, the cap on non-concessional contributions increased from $100,000 to $110,000, advice from the ATO states. This limit applies to everyone, including people aged between 67 and 74, as long as they meet the work test or can use the work test exemption.
Note that in the May 2021 Federal Budget, the Government put forward a plan to largely do away with the work test. If this becomes law, the ATO explains, people aged 67 to 74 will be able to make voluntary or salary-sacrificed contributions without needing to meet the work test (subject to the normal contribution caps discussed above).
What is the transfer balance cap?
The transfer balance cap is a lifetime limit on the total amount of superannuation that can be transferred into tax-free retirement income accounts, including pensions and annuities. Currently, your non-concessional contributions limit is $0 if your combined super balance, across all accounts, is equal to or greater than the general transfer balance cap of $1.7 million (increased from $1.6 million from 1 July 2021 onwards).
What is the bring-forward rule?
If you make contributions above the annual non-concessional contributions cap, you may be eligible to automatically gain access to future year caps and thus potentially avoid paying extra tax, according to the ATO. This is known as the bring-forward arrangement. Your age and super balance as of 30 June in the previous financial year will affect your eligibility for the bring-forward rule. Currently it is only available if you are 65 or younger.
Further changes to bring-forward arrangements are before the Australian Parliament at the time of writing, with the latest information available from the ATO website.
→ Read more: What is the bring-forward rule and how does it work?
Can I contribute $300,000 to my superannuation at once?
Eligible Australians aged 65 and over have been able to make a super contribution of up to $300,000 each from the proceeds of selling their main residence (home) since mid-2018. These ‘downsizer’ contributions do not count towards either the concessional or non-concessional contribution caps and are not subject to the work test or general transfer balance cap. However, funds contributed to super using a downsizer contribution do count towards your transfer balance cap.
Note that under a change proposed in the May 2021 Budget, the downsizer contribution scheme will be expanded to allow eligible people aged 60 or over to make a downsizer contribution. This change is not yet law but will likely take effect from 1 July, 2022.
What happens if I contribute more than the limit into my superannuation?
It’s important to keep an eye on your superannuation contributions to make sure you don’t exceed the limits, as any excess can incur an extra tax liability for you unless you make use of an exception that allows you to make extra contributions, such as the carry-forward rule, the bring-forward rule or the downsizer contributions rule.
It could be worth seeking advice from your super fund or a qualified adviser if you would like advice tailored to your circumstances.
What happens if I exceed my concessional contributions cap?
If you exceed your concessional contributions cap, the excess amount will be included in your assessable income and taxed at your marginal tax rate, meaning you may have to pay extra tax. The ATO advises a 15% tax offset will be applied to the excess amount to account for the tax already paid by your super fund. You may elect to withdraw up to 85% of your excess contributions from your super fund to help pay your income tax liability.
The ATO will let you know via a determination letter and a Notice of Assessment should you exceed your concessional contributions cap and have additional income tax to pay. The determination letter will inform you of any actions you need to take and what options you have to settle the matter.
What happens if I exceed my non-concessional contributions cap?
If you exceed your non-concessional contributions cap, the ATO will inform you after assessing information from your super fund and your tax return (if you lodged one). You will receive a determination letter explaining your options and must lodge a tax return for that year.
The ATO will manage the release of excess money from your super, plus any associated earnings the excess amount accrued while in your super fund. The associated earnings minus a 15% tax offset will be added to your assessable income and taxed at your marginal tax rate. Alternatively, you could elect not to release the excess contribution from your super fund, in which case, you would pay 47% tax on the entire excess non concessional contributions.
Cover image source: 1599686sv/Shutterstock.com
Additional reporting in July 2021 by our Sub Editor Tom Letts to account for changes announced in the Federal Budget.