We hear everywhere that it’s a great idea to put as much as we can afford into our superannuation funds to set ourselves up for retirement. This money is invested by the fund with the underlying idea that it will result in significant returns that will support us upon reaching retirement until death.

Concessional vs Non-Concessional

What you may not realise is that all super contributions fall under one of the above categories. Concessional contributions are all contributions made to super with your before-tax income, meaning either you or your employer will receive a tax-deduction for the contribution. This is usually super paid by your employer under super guarantee laws, being 9.5% of your ordinary income, but can also include personal contributions you make (see below). Non-concessional contributions are contributions made with income that has either already being taxed in your own name or will be at the end of the financial year when you lodge a tax return. You don’t get a tax deduction for non-concessional super contributions. A potential advantage of concessional contributions is that they are tax deductible at your marginal tax rate (i.e. up to 45%) whereas the super fund generally pays 15% tax on receipt of the contribution. The difference is a real saving towards your retirement and provides opportunities for those wanting to contribute more to super.

Claiming a tax deduction for personal super contributions

It is possible to claim a tax deduction for any personal super contributions made during the year so they can be treated as concessional rather than non-concessional. This will result in the potential tax savings outlined above.

Too good to be true?

We need to keep in mind that there is a concessional contribution cap of $25,000 annually for all taxpayers. This cap includes both employer contributions and personal contributions. Employers only need to pay the 9.5% super guarantee up to a maximum limit on an employee’s earnings each quarter of $55,270. This would result in super paid of $5,250.65 each quarter and $21,002.60 annually, which we find is below the cap. Nevertheless, employers can pay more super to their employees if they wish, at any income level. This may put them over the contributions cap, even if they earn less than the maximum earnings limit.

What next?

If you happen to go over the $25,000 concessional contributions cap, the ATO will send to you an Amended Notice of Assessment for that financial year, increasing your taxable income by the amount you were over the cap. This is done to re-allocate the contributions as non-concessional and to charge at your marginal tax rate. There is also a small excess concessional contributions (ECC) charge which has the intent of acknowledging that the tax is collected later than it would have been if you didn;t have excess contributions. The ECC is calculated from the start of the income year until the day before the tax is due to be paid and uses a compounding interest formula.

Pro tips:

  • When you get your amended assessment you can elect to release the excess contributions from your super fund which can help in paying any additional tax and the ECC.
  • To obtain a tax deduction for personal contributions you must give your super fund a notice of intention to claim a deduction before you lodge your tax return – this is a standard ATO form.
  • If you have made any personal super contributions during the year, bring your annual superfund statement in when you come to complete your annual tax return so an accountant can work out if you can claim a deduction, and if so, how much

Other related blogs:

Allowing catch up concessional contributions
Super Concessional Contribution Cap
Contributing to super – options for employees

Author: Jake Solomon
Email: jake@faj.com.au