Adding to your superannuation even in small amounts can provide a welcome boost to the amount you will have saved at retirement. But how can you contribute, how much can you contribute, and what are the tax implications?
Contributions that are made into your superannuation fund before tax are called concessional super contributions.
Concessional superannuation contributions can include:
If you are eligible for super guarantee (SG) contributions, your employer must pay a minimum of 9.5% of your ordinary time earnings into your super account at least every three months.
Ordinary time earnings are what you earn for your ordinary hours of work, including bonuses, commissions, allowances and some paid leave.
Salary sacrifice, or salary packaging, is an arrangement between an employee and an employer that allows an employee to pay for goods or services straight from their pre-tax salary.
Salary sacrificing offers a number of key benefits to employees, including:
You can salary sacrifice many things, including tangible items such as a car or new computer, or non-tangible items including childcare payments, health insurance, school fees or car loan repayments. Depending on your (and your employers’) circumstances, Fringe Benefits Tax (FBT) often applies to benefits provided under salary sacrifice arrangements.
Most employers offer salary sacrifice into superannuation to all their employees (which does not attract FBT). However, they may restrict which employees can package other benefits. Check with your employer for the purposes of this discussion we have limited our comments to superannuation.
While salary sacrificing into superannuation has many benefits, be aware that your money will be locked away at least until you reach preservation age; and there are limits on how much you can salary sacrifice into super.
Yes, under salary sacrificing arrangements you can ask your employer to pay a portion of your pre-tax salary as an extra contribution to super (concessional contribution).
You can also contribute to your superannuation personally and claim this contribution as a personal tax deduction. By contributing personally and claiming a tax deduction, your net tax benefit will be the same as salary sacrificing. However, by salary sacrificing the pre-amount goes into superannuation straight away, whilst by making tax-deductible contributions you must wait until you complete your tax return before the tax benefit can be enjoyed (i.e. as this is when you will receive the tax benefits of claiming the deduction). It is also worth noting that if you are going to claim contributions as a tax deduction you must notify your superannuation fund normally by completing a Notice of Deductibility. Your pre-tax and tax-deductible contributions will generally be taxed by the super fund at 15% – the same as your employer’s compulsory contributions. For most people, this will be lower than their marginal tax rate.
However, this strategy is only really tax-effective if you earn more than $37,000 per year.
It is important to note that concessional contributions are capped at $25,000 each financial year. If you contribute more than this, you may have to pay extra tax. (Please be aware that there are instances where you can use the unused portion of the $25,000 from previous years. This is dependent on the sum of all of your superannuation funds’ balances).
The concessional contribution cap includes the total of your employer and salary sacrificed contributions. It also includes any contributions you personally make into your super and claim as a tax deduction.
Non-concessional contributions are contributions made into your super fund from after-tax income for which you do not claim a personal tax deduction. They are not taxed in your super fund.
Examples of non-concessional super contributions include:
You can make post-tax personal super contributions simply by depositing your personal money into your super. These are after-tax, or non-concessional super contributions because you have already paid tax on the money.
Currently, the cap for non-concessional contributions is $100,000 per financial year, provided your total super balance on 30 June 2019 was less than $1.6 million.
If you are under age 65 you can bring forward up to two years of the non-concessional cap, allowing you to contribute up to $300,000 at a time, depending on your super balance. If you contribute more than this, you may have to pay extra tax.
Spouse contributions are superannuation contributions you can make on behalf of your ‘spouse’ (whether you are married or in a de-facto relationship).
The primary benefits of spouse contributions are twofold:
To be eligible to make a spouse contribution, your spouse must either be:
In addition, in order to be eligible for the tax offset, you must both be Australian residents. Your spouse’s income must be $37,000 or less for you to qualify for the full tax offset and less than $40,000 for you to receive a partial tax offset.
The Government co-contribution is designed to help low and middle-income earners boost their retirement income.
The Australian Government will make a co-contribution of up to $500 for eligible people who make personal after-tax contributions to their super fund.
To be eligible for a government co-contribution you must:
You are not entitled to a super co-contribution for any personal contributions you have made that are claimed as a tax deduction.
How much you receive will depend on your income and how much you contributed to your superannuation.
For example, if you earn less than $37,697 the maximum co-contribution is $500 – based on 50c from the government for every $1 you contribute. In order to receive this maximum $500 government co-contribution, you would need to have made a $1,000 personal after-tax contribution to your fund during the current financial year (and meet other eligibility criteria).
To find out more go to the Australian Tax Office’s webpage on Calculating your super co-contribution.
You don’t need to apply for a government co-contribution.
When you lodge your tax return, The Australian Taxation Office (ATO) will work out if you are eligible for a government co-contribution. If your superannuation fund has your tax file number (TFN), the ATO will pay the co-contribution directly and automatically into your super account.
The concessional contributions cap is the maximum amount of concessional contributions you can make to your super in a single financial year. If you contribute more than these caps, you may have to pay extra tax.
Concessional contributions typically include:
If you have more than one fund, all concessional contributions made to all of your funds are added together and counted towards the concessional contributions cap.
Currently, the general concessional contributions cap is $25,000. The cap is indexed in line with average weekly ordinary time earnings in increments of $2,500. As noted there are instances where you can use the unused portion of the $25k cap in future years. This may mean that you can contribute more than $25k in one year depending on your previous years’ contributions and the total balance of all of your superannuation funds. Speak to a financial planner before exercising this entitlement to ensure that you are eligible.
Yes, you can – but if you exceed the cap you may have to pay extra tax.
The tax you will pay will depend on whether the contributions were concessional (before tax) or non-concessional (after-tax).
If you exceed your concessional contribution cap for the year:
If you have excess concessional contributions, you may choose to withdraw up to 85 per cent of your excess concessional contributions from your super fund to help you pay the extra tax liability.
If you choose not to withdraw your excess concessional contributions, these excess contributions will also be counted toward your non-concessional contribution cap.
If you exceed your non-concessional contribution cap for the year, you may be able to withdraw the excess amount and 85 per cent of any earnings on that amount.
If you withdraw this amount, the earnings amount will be taxed at your MTR, less a 15% tax offset.
If you decide to leave your excess contributions in your fund:
We recommend you talk to your trusted financial adviser before making a decision to exceed either contribution cap.
To learn more about super contributions, call the practice or make an appointment with one of our friendly and professional team. We would be happy to help!
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