What are concessional contributions?

Superannuation is designed to be a tax-effective way to save for retirement, but did you know there are limits on how much you can contribute both before and after tax?

Understanding the difference between concessional and non-concessional contributions, and the way each is treated, may help you make the most of your super account.

What are concessional contributions?

Concessional contributions, also called before-tax contributions, are the funds that go into your super account from your before-tax income.

Your concessional contributions can come from a few different sources, such as employer superannuation guarantee amounts, a salary sacrifice arrangement you’ve made with your employer, or tax-deductible contributions (e.g., if you’re self-employed or decide to make extra contributions yourself).

Concessional contributions typically make up the bulk of your super savings and are generally taxed at 15%, according to the Australian Tax Office (ATO).

What is the concessional contribution cap?

For the 2021-22 financial year, the concessional contribution limit (or cap) is $27,500. The ATO explains that any concessional contributions you make above the cap are included in your taxable income and are taxed at your marginal tax rate, plus an excess concessional contributions charge.

In the past, there were different limits for concessional contributions depending on your age, but from the 2017–18 financial year onwards the rules were simplified. Now, the limit is $27,500 regardless of your age.

An important point to note is that if you split your before-tax contributions and give some to your spouse, these contributions still count towards your concessional cap.

What are carry-forward concessional contributions?

If you have not reached the concessional contribution cap for a particular financial year, you may be able to carry the difference forward to increase your cap in a subsequent year.

This carry-forward rule (not to be confused with the bring-forward rule we’ll cover later on in this article) only applies to unused concessional cap amounts from July 2018 onwards and any amounts eligible to be carried forward expire after five years.

You can only carry forward concessional contributions if your super balance was less than $500,000 at the end of 30 June in the previous year, the ATO says. Carry-forward concessional contributions are sometimes referred to as ‘catch-up’ contributions.

What are non-concessional contributions?

Non-concessional contributions are, as you probably guessed, super contributions made from your after-tax income.

From 1 July 2021, the annual non-concessional contributions cap is $110,000, but the bring-forward rule allows eligible people to increase this amount by using some of their cap from future years in the current year.

Non-concessional contributions aren’t taxed when they’re received by your super fund, but once the money is added to your account, any investment earnings will be subject to the usual superannuation tax rate of up to 15%, according to the ATO. When you access your super in the future, your non-concessional contributions will be returned to you tax-free.

If you make non-concessional contributions, you may also be eligible for a super co-contribution up to $500 from the Australian Government. This benefit applies to low- or middle-income earners, and is worked out based on both your income and the amount you add to your super account. There’s no need to apply for it, and the benefit is paid automatically to your super account when you lodge your tax return, if your super fund has your tax file number (TFN).

From the 2021-22 financial year onwards, if your total super balance is greater than $1.7 million on 30 June in a given financial year, your non-concessional contributions cap and bring-forward amount available will be $0 in the subsequent year.

How to stay within your super contributions caps

Exceeding the caps on super contributions can be costly, as extra tax and other costs may apply, according to the ATO.

The ATO says that you may be able to avoid going above the caps by taking steps, such as:

• being aware of what your current caps are
• keeping tabs of what your super balance is
• checking when your employer (or employers, if you have more than one job) pays the contributions and when they were received by your super fund. The ATO says contributions count towards a cap in the year your super fund receives them, not when they were paid.
• considering stopping or reducing any before-tax voluntary contributions to your super, if you think you may go over your concessional contributions cap in the current financial year.

If you are unsure about how the caps may affect you based on your circumstances, or are looking for guidance about how to maximise your retirement savings using concessional or non-concessional contributions, it may be beneficial to seek the support of a financial adviser, either through your super fund if advice is available or from an external financial planner.

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