Cashing in on the co-contribution rules (2012/2013 year)

Note: The co-contribution rules for the 2012/2013 year are very different from the co-contribution rule applicable for the 2011/2012 year. For your reference and convenience, we have retained the 2011/2012 co-contribution rules at the end of this article.

The Federal Government is giving away money to anyone who makes a non-concessional (after-tax) contribution to their super fund, and who earns less than $46,920 a year (for the 2012/2013 year). The tax-free giveaway is officially called the co-contribution scheme.

You receive a tax-free super contribution from the Federal Government when you make a non-concessional (after-tax) contribution to your super account, subject to you satisfying a work test, income test and age test. I explain these three tests later in the article.

If you earn $31,920 or less (for the 2012/2013 year), the Federal Government pays $0.50 (50 cents) for every dollar you contribute to your super fund in after-tax dollars, up to a maximum of $500 a year (subject to legislation).

For example, if you make a $1000 non-concessional contribution, your super fund account receives a $500 tax-free contribution from the Government. If you make a $600 contribution, the Government pays $300 into your super fund.

Note: Although $500 in tax-free money is a great incentive to contribute to your super account, the government co-contribution is half of what you would have got if you made the non-concessional contribution in the 2011/2012 year.

How does the co-contribution scheme work?

If you earn more than $31,920, your co-contribution entitlement reduces by 3.33 cents for every dollar you earn over $31,920, until it cuts out at $46,920 (for the 2012/2013 year). For example, if you earn $40,000 and you make an after-tax contribution of $1,000, the Government’s maximum contribution of $500 is reduced by $264, which potentially gives you a co-contribution of $236.

Note: The income levels for co-contribution eligibility should have been increased for the 2010/2011 and 2011/2012 years and 2012/2013 years, but the Government has decided to freeze the income thresholds for these two years, and the bad news is that the federal government has cut the upper threshold from the 2012/2013 year onwards.

Although the co-contribution scheme is a fantastic scheme, a major criticism that I have with the co-contribution policy is that those individuals raising children full-time, or caring full-time for sick or elderly relatives are not eligible for the co-contribution. I explain my long-held views way back in the April 2009 edition of THE SOAPBOX: Women and carers ignored by super lawmakers.

The co-contribution tax-free giveaway is subject to three main tests: what I call the co-contribution work test, the income test and the age test. 

1. Co-contribution work test

For individuals to be eligible for the co-contribution scheme, you must earn 10% or more of your income from eligible employment, or 10% or more of your income from carrying on a business, or a combination of both.

Note: If you’re aged 65 or over you must satisfy a second work test to be eligible for the co-contribution. In effect, if an individual is aged 65 or over (but under 71), they must meet two work tests to be eligible for the co-contribution. One work test enables an individual to make personal contributions to a super fund, and a second work test enables an individual to be eligible for the co-contribution scheme.

Work test one: If you are aged 65 or over and plan to make super contributions, then you must satisfy a work test. You must be gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which the contribution is made.

Work test two: You must earn 10% or more of their income from eligible employment, or 10% or more of their income from carrying on a business, or a combination of both.

2. Co-contribution income test

You must also satisfy an income test. The Government’s tax-free co-contribution is available for any person who receives total income from employment or self-employment and earns less than $46,920 a year in the 2012/2013 financial year, and makes a non-concessional (after-tax) contribution to their super fund. This income threshold is indexed each year in line with increases in average weekly earnings.

Note one: The co-contribution ‘total income’ threshold is assessable income, plus the value of any fringe benefits that you have as part of your salary package, such as a car PLUS any salary sacrificed contributions. Assessable income also includes bank interest and net capital gains from selling shares or property.

Note two: The co-contribution income threshold also includes salary sacrificed contributions. What this means is that individuals on higher incomes, seeking to access the co-contribution scheme, cannot salary sacrifice (that is, make before-tax super contributions to their super fund), to lower their income to a level that allows them to receive the tax-free Government co-contribution.

Important: If you run a business, your income, for the purposes of satisfying the income threshold, is reduced by any business deductions incurred in carrying on the business. For satisfying the 10%-plus work test (see co-contribution test number one earlier in the article), however, you are measured against your gross business income. This is a very important distinction that recognises that self-employed individuals often have net incomes (after deducting expenses) under $46,920 even though their gross business income may be well over the income threshold for the co-contribution.

3. Co-contribution age test

And finally, the age test: you must be under 71 at the end of the financial year in which you make your after-tax contribution to be eligible for a co-contribution.

TFN alert: Your super fund cannot accept after-tax contributions, or receive co-contributions on your behalf, if you have not provided your tax file number (TFN) to your fund.

The co-contribution payment process: in 3 steps

1. Assuming you earn less than $46,920 for the 2012/2013 year, you then make a non-concessional (after-tax) contribution to your super fund.
2. You lodge your 2012/2013 tax return.
3. Within 60 days, the Government pays the co-contribution into your super fund.

You can find more information about the co-contribution rules on the ATO website.

You can work out your co-contribution entitlement by using the ATO co-contribution calculator.

Co-contribution rules for the 2011/2012 year

For the 2011/2012 financial year, the following co-contribution rules applied:

• You receive a tax-free super contribution from the Federal Government when you make a non-concessional (after-tax) contribution. If you earn $31,920 or less (for the 2011/2012 year), the Federal Government pays $1.00 for every dollar you contribute to your super fund in after-tax dollars, up to a maximum of $1,000 a year.
• For example, if you make a $1000 non-concessional contribution, your super fund account receives a $1,000 tax-free contribution from the Government. If you make a $600 contribution, the Government pays $600 into your super fund.
• If you earn more than $31,920, your co-contribution entitlement reduces by 3.33¢ for every dollar you earn over $31,920, until it cuts out at $61,920 (for the 2011/2012 year). For example, if you earn $40,000 and you make an after-tax contribution of $1,000, the Government’s maximum contribution of $1,000 is reduced by $269, which potentially gives you a co-contribution of $731. If you earn $40,000 in total income, then even when you make a non-concessional contribution of $731 (rather than $1,000) you’ll still receive a co-contribution of $731.
• You must also satisfy an income test. The Government’s tax-free co-contribution is available for any person who receives total income from employment or self-employment and earns less than $61,920 a year in the 2011/2012 financial year, and makes a non-concessional (after-tax) contribution to their super fund. This income threshold is indexed each year in line with increases in average weekly earnings.
• Note one: The co-contribution ‘total income’ threshold is assessable income, plus the value of any fringe benefits that you have as part of your salary package, such as a car PLUS any salary sacrificed contributions. Assessable income also includes bank interest and net capital gains from selling shares or property.
• Note two: The co-contribution income threshold also includes salary sacrificed contributions. What this means is that individuals on higher incomes, seeking to access the co-contribution scheme, cannot salary sacrifice (that is, make before-tax super contributions to their super fund), to lower their income to a level that allows them to receive the tax-free Government co-contribution.
• Important: If you run a business, your income, for the purposes of satisfying the income threshold, is reduced by any business deductions incurred in carrying on the business. For satisfying the 10%-plus work test (see co-contribution test number one earlier in the article), however, you are measured against your gross business income. This is a very important distinction that recognises that self-employed individuals often have net incomes (after deducting expenses) under $61,920 even though their gross business income may be well over the income threshold for the co-contribution.