Types of superannuation contributions

Superannuation is money that is put aside during your working life, which can be used as a source of income when you retire. The objective is to use this income as a substitute for the Age Pension, or to provide funds in retirement in addition to any government benefits.

Compulsory super was started in 1991 with the introduction of the Superannuation Guarantee (SG) which was a compulsory contribution system, paid for by employers. Your super can grow over time through the superannuation guarantee contributions your employers make, but you also have the option of making additional contributions yourself.

Why contribute to super?

Your super is specifically in place to help you grow wealth in preparation for your retirement. Contributing to your super can help you grow your nest egg to achieve the retirement standards (lifestyle) you would like. Super represents a good type of compulsory savings because it’s generally invested in long-term assets that have the potential to accrue larger interest over an extended period of time, than say savings accounts, and also because you can’t easily get your hands on the cash.

One of the reasons you may choose to save money in your super is its tax effectiveness. For example, payments put into your super fund from your pre-tax income are called concessional super contributions and taxed at 15% in your fund, compared with 19%, which is the lowest marginal income tax rate for residents with taxable income greater than the annual tax-free threshold of $18,200.

However, there are limits (contribution caps) on the amounts that you can put into your super and still attract tax benefits or claim as a personal tax deduction. The caps are different for concessional (before-tax) and non-concessional (after-tax) contributions. If you exceed any of these caps, the Australian Taxation Office (ATO) warns you may have to pay extra tax.

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Types of superannuation contributions

You can make contributions to your super in a number of ways. You can generally choose to contribute to your superannuation using either your pre-tax or after-tax income, different caps applying to how much you can contribute using each method. In addition to receiving compulsory contributions from your employer, some of the ways you may be able to contribute to your super include:

Concessional (pre-tax) super contributions

1. Salary sacrificing – you may be able to salary sacrifice some of your pre-tax income to grow your super. Speak with your employer to find out if it offers this.
2. Voluntary contributions you make from your after-tax income and claim as a tax deduction.

Non-concessional (after-tax) super contributions

1. Voluntary contributions you make from your after-tax income that you don’t claim a tax deduction for.
2. Spouse super contributions that you receive from your partner – more on this below.

Other types of super contributions

1. Contributions from the Federal Government, as part of its co-contribution scheme.
2. Rollovers – i.e. transfers of money from one super fund to another (such as when consolidating superannuation).
3. Downsizing contributions to super – from 1 July, 2018, individuals 65 years old or older may be eligible to make a ‘downsizer contribution’ of up to $300,000 into their superannuation from the proceeds of selling their home.
4. Some small business owners may be able to contribute to their own super when they dispose of business assets, provided their business is eligible. The Capital Gains Tax cap (CGT cap) exists to allow small business owners to make large contributions into superannuation, once their business assets have been sold. However, eligibility caps can be complex and it could be a good idea for small business owners to obtain specialist advice from their accountant to understand how the rules apply to their own particular circumstances.

→Related article: How to make voluntary superannuation contributions

How much can you contribute to your super?

The amount you are able to contribute to your super without a tax penalty will vary depending on the type of contribution you are making.

Concessional contribution and limits (caps)

The general concessional contributions cap, that is contributions from your pre-tax income, is currently $25,000 each financial year. This is set to rise to $27,500 from 1 July, 2021, for the 2021-22 financial year onwards.

Carry-forward rule (topping up)

If you have a total super balance of less than $500,000 at 30 June of the previous financial year, you can ‘carry forward’ any unused portions of your contribution caps from previous years (not before 2018/19) to increase your concessional cap, meaning you could put in more than your usual limit without paying extra tax. You can learn more about the concessional contributions cap on the ATO’s website.

Make sure you are adding up the numbers carefully when you’re making any additional contributions – if you exceed your contributions cap, you may end up having to pay extra tax.

Non-concessional contributions and caps

The general non-concessional contributions cap is currently $100,000 per year. It is set to rise to $110,000 from 1 July, 2021, for the 2021-22 financial year onwards.

Your own cap might be:

• Higher if you are using the bring-forward arrangements, or
• Nil if your Total Super Balance (TSB) is greater than $1.6m (at the time of writing, though this limit will increase to $1.7m from 1 July, 2021). Your TSB includes all your super interests and may be different from your super fund account balance.

Make sure you add up the numbers carefully when you’re making any additional contributions – if you exceed your contributions cap, you may have to pay extra tax.

Who can contribute to super in Australia?

Anyone under age 65 can make a contribution to their super, even if they are retired or not working. However, special conditions apply for under 18s and (for now at least) people aged 65 and over.

If you are under 18, earn at least $450 in a calendar month pre tax, and work more than 30 hours a week, your employer can make super contributions. However, if you are not working and under age 18, the ability to contribute to super may be limited.

From 1 July, 2020, the recent change in legislation has allowed making contributions to super easier for anyone aged 65 or 66 years of age as there now is no requirement to meet the work test. But once an individual reaches 67 years of age, the work test must be met prior to the contribution being made.

The work test requires a person to be gainfully employed for at least 40 hours in 30 consecutive days during the financial year before concessional or non-concessional contributions can be made after reaching the age of 67.

In the May 2021 Federal Budget, the Government announced plans to scrap the work test almost entirely. If passed into law, the ATO explains, this would mean 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). They would still need to meet the work test in order to claim a tax deduction for their personal contributions, however.

This change hasn’t yet become law at the time of writing, but it is expected to take effect from 1 July, 2022.

Tax and other considerations of super contributions

The section below summarises a range of different types of super contributions, along with some information about their potential tax implications, annual caps and eligibility criteria at the time of writing, as outlined by the ATO.

Employer Super Guarantee payments

Contribution type: Concessional. The SG rate is a percentage of your pay (currently 9.5%, rising to 10% on 1 July, 2021).
Contributions tax: 15% tax on concessional contributions up to the annual cap.
Annual cap: Up to $25,000 per financial year for all concessional contributions (rising to $27,500 on 1 July, 2021).
Eligibility: Special conditions if aged under 18 years or 65+.

Salary sacrifice or personal tax-deductible contributions

Contribution type: Concessional.
Contributions tax: 15% tax on concessional contributions up to the annual cap.
Annual cap: Up to $25,000 per financial year for all concessional contributions (rising to $27,500 on 1 July, 2021).
Eligibility: Check if your employer allows salary sacrifice contributions. See the ATO website for more information on tax deduction eligibility.

Catch-up contributions under the carry-forward rule

Contribution type: Concessional.
Contributions tax: 15% tax on contributions up to the annual cap.
Annual cap: You can make these additional contributions if you haven’t used up all of your concessional caps in earlier years.
Eligibility: Available from 1 July, 2019. Total super balance must be less than $500,000 as at 30 June in the most recent financial year.

Low-income super tax offset (LISTO)

Contribution type: Government.
Contributions tax: Any tax paid by your fund is automatically refunded to your super through the LISTO.
Annual cap: Up to $500 per financial year.
Eligibility: Taxable income must be less than $37,000.

Division 293 tax for high-income earners

Contribution type: Any.
Contributions tax: You pay division 293 tax, i.e. an extra 15% on your super contributions
Annual cap: Usual caps apply (currently $100,000 per financial year, increasing to $110,000 on 1 July, 2021).
Eligibility: If your combined super contributions + income are over $250,000 for a financial year, you will pay this extra tax.

Government co-contribution scheme

Contribution type: Government.
Contributions tax: 0%
Annual cap: $500 maximum yearly entitlement goes to your super (matches 50% of your eligible contribution).
Eligibility: You must be less than 71 years old with a taxable income below certain thresholds. The co-contribution applies to personal after-tax contributions of up to $1,000. You must receive at least 10% of total income from employment or business activities.

Rolling over super

Contribution type: Personal (transferring money from one super fund to another).
Contributions tax: In most cases, no additional tax applies to your super if you are simply consolidating your existing savings.
Annual cap: –
Eligibility: Anyone with more than one super account can roll super into one fund.

Voluntary after-tax contributions

Contribution type: Non-concessional.
Contributions tax: 0%
Annual cap: Usual caps apply (currently $100,000 per financial year, rising to $110,000 on 1 July, 2021).
Eligibility: The total super balance cap is $1.6m (rising to $1.7m on 1 July, 2021). The transfer balance cap is the same figure, and is the maximum you can transfer to your super pension fund.

Downsizer contributions when you sell your home

Contribution type: Personal – a contribution from the proceeds of selling your home.
Contributions tax: 0%
Annual cap: Up to $300,000 after-tax, annual contribution caps don’t apply. The total super balance cap doesn’t apply.
Eligibility: Age 65 or older, other conditions apply. No work test required. May affect Age Pension eligibility. Note that under a change proposed in the 2021 Budget, the 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.

Additional ways of making super contributions (special rules)

Making spouse contributions

Spouse superannuation contributions can be made from your after-tax dollars to help boost your spouse’s superannuation account.

To be eligible for the maximum tax offset, which works out to be $540, you need to contribute a minimum of $3,000 and your partner’s annual income needs to be $37,000 or less. If their income exceeds $37,000, you may still eligible for a partial offset. However, once their income reaches $40,000, you’ll no longer be eligible for an offset, but you can still make contributions on their behalf.

The maximum non-concessional contributions cap is $100,000 per year (though this is set to rise to $110,000 from 1 July, 2021), so your partner may have to pay extra tax if your contributions take them over this limit. However, if your partner is under age 65, they may be able to make use of the three-year bring-forward rule.

Spouse contributions splitting

You can also contribute to your partner’s super by having some of your own super contributions going to their account. Please note that your partner’s age and work status will affect their eligibility.

Small business

Some small business owners may be able to make super contributions without affecting their after-tax contribution limits when they sell their business or dispose of business assets. If this is you, you may want to contact a finance professional to discuss eligibility and the concessions that may be available to you.

What are the main advantages and disadvantages of super contributions?

If you’re considering making additional contributions to your superannuation (outside the compulsory superannuation guarantee payments your employer makes) it can help to weigh up some potential pros and cons.

Pros: Super can be a tax-advantaged savings environment

Concessional contributions, plus any earnings within your super fund, are taxed at a maximum of 15%, provided your contributions remain within the contribution limits discussed earlier.

If you’re receiving a pension through your super, those earnings are normally tax-free.

By contrast, equivalent investment earnings outside super may be taxed at your marginal tax rate, which is usually higher than 15%.

Pros: Income tax savings

Reducing your taxable income, for example by salary sacrificing into your super, can often result in a lower taxation rate and a bigger retirement nest egg.

Pros: Compounding

Albert Einstein is reputed to have said:

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.

Compound interest is interest paid on an initial amount of money you borrow or invest, plus the accumulated interest. You earn interest on the money you deposit, and on the interest you have already earned. In your super, the compounding effect happens automatically over many years, as super can be thought of as “forced savings” due to the compulsory nature of super guarantee payments.

Pros: Help save for your first home

You can make voluntary contributions to your super and apply to withdraw these funds (plus earnings) to help with your first home purchase. This is known as the first home super saver scheme and may assist you in saving your deposit faster than in a savings account. However, there are limits to how much you can withdraw, as well as other eligibility criteria.

Con: Limited access to your funds

Your super is a compulsory savings scheme, so you generally can’t make a withdrawal unless you meet a condition of release, such as reaching age 65.

Con: Potential tax implications

It is important to understand the contribution caps, as exceeding them could result in having to pay extra tax.

Con: Potential performance volatility

While superannuation funds tend to produce long-term returns that are much higher than those of other investment vehicles such as savings accounts and term deposits, they are generally subject to more volatility. For example, during the GFC and the early parts of the coronavirus pandemic, some funds had negative returns. It is important to understand your risk appetite and ensure you are comfortable with your fund’s performance, though keep in mind past performance is not a reliable indicator of future performance.

Upcoming legislative changes

The concessional and non-concessional contribution caps are both set to increase from 1 July, 2021. The concessional cap will increase from $25,000 to $27,500 and the non-concessional cap from $100,000 to $110,000.

There is also a proposed increase to:

• the super guarantee payment made by employers
• the bring-forward rule, and
• certain eligibility age limits for contributions.

However, at the time of writing, some of these changes are not yet law. It’s a good idea to contact a finance professional if you think these proposals will affect you.

Please note that the scheduled increase of the super guarantee rate from 9.5% to 10% on 1 July, 2021 has now been effectively confirmed by the Federal Government, with Australian Treasurer Josh Frydenberg announcing no changes to the proposed increase in the May 2021 Budget. Other changes set to take place in 2022, such as the scrapping of the work test, have not yet been confirmed at the time of writing.

About Elizabeth Hatton

Elizabeth Hatton is a director and financial planner at Viva Financial Planning. She has worked in the financial services industry since 2008 and has a special interest in tax planning, and sustainable and ethical investments.

Cover image source: maxpro/Shutterstock.com

This article was last updated in June 2021 by our Sub Editor Tom Letts to account for measures announced in the Federal Budget.