How Are Super Contributions Taxed?

You could have a number of options when it comes to making voluntary super contributions, but according to the Australian Taxation Office (ATO), different tax rates and caps apply to each. Here’s a guide to how different super contributions are taxed.

While most eligible employees in Australia receive super contributions from their employer, voluntary super contributions could help further build your retirement savings.

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What are the different ways I can contribute to my super?

If you’re an employee, you’re probably aware that your employer makes contributions to to your superannuation fund based on the Superannuation Guarantee (SG). The ATO indicates there are also two main ways you can make voluntary contributions to your superannuation: concessional super contributions (also known as pre-tax contributions) and non-concessional super contributions (also known as after-tax contributions).

Here’s a brief explanation for each one.

Concessional super contributions

According to the ATO, there are two ways to make concessional super contributions in addition to the SG contributions your employer makes.

The first is to set up a salary sacrifice arrangement with your employer. Basically, you ask your employer to contribute some of your pre-tax salary to your super account. This amount can be either a specified dollar amount or a percentage of your pay; the former tends to suit people receiving a salary or regular wage, and the latter is often used by people casually employed, or those with irregular wages. You can read more about the process on the ATO website here.

The second is to make one or more contributions directly to your super fund, and claim a tax deduction for these amounts. This option has only been available since 1 July 2017.

As well as adding to your retirement savings, the ATO  claims concessional super contributions could potentially help reduce your taxable income.

How are concessional super contributions taxed?

The ATO advises that concessional super contributions will generally be taxed at a flat rate of 15% once received by your super fund.

If you earn over $37,000 p.a., 15% could potentially be rather attractive compared to your marginal tax rate, which will see you paying at least 32.5 cents for every dollar over $37,000 you earn (ignoring any potential deductions or offsets).

Another possible benefit of making concessional contributions is that, depending on your original and new taxable income, you could potentially either become eligible for the low income tax offset or receive a larger low income tax offset.

What are the caps on concessional super contributions?

The ATO notes there is a limit to how much money you can funnel into the (normally) low-tax environment of your superannuation fund, and potential penalties for exceeding that limit.

According to the ATO, the cap on concessional super contributions is $25,000 at the time of writing, but that includes your employers contributions (9.5% of your income) as well as any salary sacrifice or personal deductible contributions you make – so keep that in mind when considering whether you want to salary sacrifice, how much you want to salary sacrifice, and any personal contributions you want to make and claim a tax deduction for.

If you surpass the $25,000 limit, the ATO points out that any further contributions will be treated as regular income and taxed at your marginal tax rate by your super fund; you will also have to pay an excess concessional contribution charge, which essentially reimburses the government for the income tax you didn’t pay on any income salary sacrificed after you hit the $25,000 cap. The excess concessional contribution charge rate changes every quarter; the rates for this year are listed below:

Quarter Annual rate Daily rate
October – December 2017 4.70% 0.012876712328767%
January – March 2018 4.72% 0.012931506849315%
April – June 2018 4.77% 0.013068493150685%
July – September 2018 4.796% 0.013589041095890%

Source: ATO

For more information on the excess concessional contribution charge, head here.

The ATO advises that you can withdraw up to 85% of your excess concessional contribution to pay the extra income tax. If you don’t withdraw the excess concessional contribution, or you leave some of the excess concessional contribution in your super fund, this excess amount then counts towards your non-concessional contributions cap, and you may be up for potential penalty tax.

For high-income earners making concessional super contributions, there’s also a thing called Division 293 tax. If your income for surcharge purposes plus low-tax contributions is over $250,000, the ATO advises that you will be taxed at 15% on either your contributions, or the amount that is over the threshold – whichever amount is lower. For a more detailed explanation of Div 293, head here.

Non-concessional (after-tax) super contributions

According to the ATO, after-tax super contributions can be slightly more straightforward than concessional contributions in that they generally simply involve depositing your own after-tax money into your super fund. Whether it’s a small amount or a large lump sum, you can generally move the money to your super fund via bank transfer, cheque, BPAY, or your other payment method of choice.

How are after-tax contributions taxed, and are there any caps on them?

Because any money you use to make a non-concessional super contribution will already have been subject to income tax, the ATO advises that there will be no additional tax levied on non-concessional contributions. However, individuals are only allowed to make non-concessional contributions totalling $100,000 p.a., and any after-tax contributions made that exceed this limit will be taxed at a rate of 47%. That being said, the ATO also notes that if you’re under 65 and have a super balance of less than $1.4 million, you’ll be able to contribute up to three times your annual cap in a single year under the ‘bring-forward’ arrangement. The table below shows the bring-forward periods and maximum non-concessional contributions caps for the first year for different super balances.

Total superannuation balance on 30 June 2017 Maximum non-concessional contributions cap for the first year Bring-forward period
Less than $1.4 million $300,000 3 years
$1.4 million to less than $1.5 million $200,000 2 years
$1.5 million to less than $1.6 million $100,000 No bring-forward period, general non-concessional contributions cap applies
$1.6 million nil na

Source: ATO

Additionally, there’s something called the capital gains tax (CGT) cap; the ATO advises that this allows you to exclude contributions from being counted towards the $100,000 cap if said contributions are coming from a capital gain from the sale of eligible small business assets. However, there is a dollar limit to how much you can exclude in this fashion, which is currently $1,445,000. The CGT cap operates on a lifetime basis, meaning that once you’ve hit it, that’s it – but that being said, the CGT cap increases by $30/$40k every financial year, so there may be opportunity to make further cap-excluded contributions.

What counts as a non-concessional super contribution?

The ATO notes that the following are considered non-concession super contributions:

  • Contributions made from your after-tax income, either by you or by your employer on your behalf
  • Contributions made by your spouse (unless your spouse is your employer)
  • Any retirement benefits you withdraw from your super and then ‘re-contribute’
  • Any transfers from foreign super funds (or similar retirement schemes) including KiwiSaver accounts
  • Any excess concessional contributions that you have not elected to release
  • Contributions that exceed your CGT cap amount

Pre- or post-tax contributions: which one’s best for me?

Your personal circumstances will determine which kind of voluntary super contribution would work best for you, but below are some general pros and cons of the two contribution methods.

Pre-tax/concessional contributions

Pros 

  • According to MoneySmart, they can be tax effective for some
  • Easy way of automating voluntary super contributions; once you’ve arranged them with your employer, they’re in place until you modify or stop them

Cons 

  • The $25,000 cap could be considered rather low when you consider that it includes 9.5% of your income by default (employer contributions)
  • Potentially disadvantageous in times of financial hardship
  • Excess concessional contributions may count towards the non-concessional cap, which could unexpected have tax consequences

After-tax/non-concessional contributions

Pros 

  • More flexible – contribute what you can, when you can
  • The $100,000 p.a. cap could be considered relatively high, particularly with the bring-forward rule taken into account

Cons 

  • According to MoneySmart, you cannot claim a tax deduction for these contributions
  • If you exceed the $100,000 cap, there can be nasty tax consequences including a 47% tax penalty

If you’re looking to make voluntary super contributions, the best method for your will depend entirely on your personal financial circumstances and habits. However, if you’re looking for a superannuation fund that caters to your needs, you can compare with Canstar.

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