Superannuation contributions can be divided into two types — concessional (before-tax) and non-concessional (after-tax). Each type of super contribution is subject to a contributions cap. A contributions cap sets a limit on the amount of contributions you can make in any one year. If you exceed the cap, your excess contributions are likely to be subject to penalty tax.
This article explains all of the important rules that apply to concessional contributions. If you’re seeking information about non-concessional (after-tax) super contributions then refer to our other article Your 2013/2014 guide to non-concessional (after-tax) contributions.
In short, for the 2013/2014 year, there are 2 concessional contributions caps (see table below) you need to be aware of when considering contribution strategies, namely:
- $25,000 cap for anyone aged 59 or under
- $35,000 cap for anyone aged 60 years or over.
Note: The $25,000 cap, which has been in place for many years, should have increased to $30,000 for the 2012/2013 year and 2013/2014 year (due to the indexation rules applicable to the contributions caps), but the Federal Government froze the contributions caps for the 2012/2013 and 2013/2014 years. The proposed concessional cap of $50,000, applicable for those 50 years and over, that was supposed to be in place from the 2012/2013 year onwards has been scrapped. Instead, from 1 July 2014, over-50s can take advantage of a higher cap of $35,000 (unindexed), while, from 1 July 2013, those 60 years and over can take advantage of a special higher cap of $35,000 (unindexed).
What is counted as a concessional contribution?
Concessional contributions, also known as before-tax contributions, include your employer’s compulsory Superannuation Guarantee contributions, additional employer contributions, and any salary sacrificed contributions that you arrange for your employer to deduct from your before-tax salary.
If you’re self-employed, or not employed, or you only receive a small proportion of your income from an employer (the 10% rule), then you can make concessional contributions that you claim as a tax deduction in your individual tax return. You must lodge a notice of intention to claim a tax deduction with your super fund.
Note: You need to be mindful of your concessional cap of $25,000 (or $35,000 if 60 years and over) when considering any salary sacrifice strategy. Your employer’s SG contributions count towards the cap, which means that anyone making additional contributions under a salary sacrifice arrangement needs to check that they don’t exceed the concessional contributions cap in place for the 2013/2014 year.
Concessional contributions cap*
|Income year||Under 50||50 years to 59 years||60 years and over|
|Income year||Under 50||Transitional cap for over-50s|
How are concessional contributions treated tax-wise?
For most Australians, concessional (before-tax) contributions are hit with a contributions tax of 15 per cent, which means making such contributions is only tax effective if you pay more than 15 cents in the dollar tax on your personal income. The employer claims a tax deduction when making SG contributions or when making contributions under a salary sacrifice arrangement. An individual using a salary sacrificing arrangement benefits tax-wise by paying less tax on the reduced personal income (although the contributions are subject to 15% tax within the fund).
Note: Since 1 July 2012, if you earn more than $300,000 a year, then your concessional super contributions (including your employer’s SG contributions) will be subject to a higher contributions tax of 30%. For more information on this extra tax measure for high-income earners see SuperGuide article Double contributions tax for high-income earners.
If an individual intending to make the concessional contributions is not an employee, then he or she can claim a tax deduction for those super contributions in his or her tax return, subject to lodging the appropriate form with his or her super fund.
Important: If you pay less than 15% tax on your wages and salary and other income, then making concessional super contributions may not be a tax-effective option. From the 2012/2013 year onwards however, super becomes more tax-effective for Australians paying less than 15% income tax on wages and salary. The government will refund any contributions tax paid on concessional (before-tax) contributions, such as your employer’s compulsory Superannuation Guarantee contributions, if you earn less than $37,000. You can expect a refund of the contributions tax deducted from your super account, paid directly to your superannuation account by the Federal Government. The federal government calls this refund of super tax, the Low Income Super Contribution (LISC). (I explain the Low Income Super Contribution, including the rules for eligibility, in our SuperGuide articles Super tax refund for lower-income earners starts July 2012 and Superannuation tax refund: 10 things you should know). Note that the Liberal Party intends to abolish the LISC if it wins government.
In my opinion, the LISC is an excellent policy because before the 2012/2013 year, if you paid less than 15% income tax on your wages and salary and other income (that is you earnt less than $37,000 in a year), you had no real income tax advantages when investing via a superannuation fund because your employer’s super contributions would be hit with 15% tax, and earnings on your super fund’s investments would be taxed at 15% tax. If you were paying a lower rate of tax than 15% on your personal income, then super was not tax-effective, and even worse, you were being penalised tax-wise by having a super account. The one important exception was if you were eligible to take advantage of the government’s co-contribution scheme. (For the 2013/2014 year, the federal government places up to $500 of tax-free super money into your super fund when you make a $1,000 after-tax contribution. See the SuperGuide article on co-contributions: Cashing in on the co-contribution rules (2013/2014).)
Note: From the 2012/2013 year onwards, the Federal Government has introduced tax cuts to offset the increase in the cost of living expected from the imposition of the carbon tax on Australia’s biggest polluting companies. The tax cuts mean a higher tax-free threshold of $18,200, and higher marginal tax rates for incomes above $18,200 and below $80,000. What this means is that for those earning more than $20,542 (for the 2013/2014 year), they will be paying 19% income tax, compared to 15% tax on super fund investment earnings, which means making concessional super contributions has become more tax-effective for more Australians.
TFN alert: If your super fund doesn’t have your tax file number, your concessional (before-tax) contributions, including SG contributions, are subject to an additional tax of 31.5 per cent, which means you end up paying 46.5% tax on your concessional contributions. That would be a pointless exercise!
What if I exceed my concessional contributions cap?
If you’re considering making concessional contributions to a super fund you need to be aware of the following issues:
- size of your concessional contributions cap
- amount of Superannuation Guarantee contributions your employer is making for the year
- timing of your super contributions, and your employer’s contributions
- submitting the correct form by a certain time, if you’re planning to claim a tax deduction for the contribution (applicable to self-employed or those substantially self-employed)
The risk of exceeding the concessional cap is much greater since the concessional caps were halved from July 2009, and then halved again for over-50s from July 2012, and the opportunities to contribute greater amounts later in life more limited. On the upside, changes made to the super rules from 1 July 2013, mean that exceeding the concessional contributions cap may not be as financially devastating as it was in the past.
If you exceed your concessional cap from the 2013/2014 year onwards, the federal government will allow you to withdraw any excess concessional contributions made from 1 July 2013 from your super fund. These excess concessional contributions will then be taxed at the individual’s actual marginal tax rate, plus an interest charge (as would happen for income tax paid late to the ATO), rather than the top marginal tax rate. If you’re already on the top marginal rate, then your super contributions will be subject to an interest charge only. Note however, the excess concessional contributions also count towards your non-concessional (after-tax) cap. It is not clear how the ATO will deal with the non-concessional cap after the excess concessional contributions are refunded.
If you have exceeded your contributions cap in previous years (before the 2013/2014 year) then expect heftier penalties. For example, if you exceeded your concessional cap for the 2012/2013 year, then the excess concessional contributions will be hit with penalty tax of 31.5%, in addition to the 15% tax payable on contribution. Again, the excess concessional contributions also count towards your non-concessional (after-tax) cap.
Note: Effective From 1 July 2011 until 30 June 2013, individuals who have breached the concessional contributions cap by up to $10,000 can request that these excess contributions be refunded to them. You can only make this request if you have breached the concessional caps for the first time. From 1 July 2013, you are permitted to withdraw all excess super contributions made on or after 1 July 2013.
For more information on how the excess contributions tax rules work see the SuperGuide article Excess contributions tax: how the new rules work.
Okay, that’s the theory, how do the rules work in real life?
Let’s look at two individuals — Robert (age 46) and Joan (age 61).
Robert: Robert is 46 and earns $85,000 plus his employer’s 9.25% SG contributions (total package of $92,863). Robert was planning to salary sacrifice $25,000 and make the most of his contributions cap. Ah, but what about Robert’s employer contributions of $7,863? If Robert proceeds with his strategy he will exceed his cap by $7,863. Any excess contributions above his cap of $25,000 will be subject to his top marginal tax rate (37%), plus an interest charge. Assuming Robert doesn’t want to go through the hassle of applying for a refund of his super contributions (or leaving the excess super contributions in the fund, but copping the extra super tax), the maximum that he can salary sacrifice for the 2013/2014 year is $17,137, after allowing for his employer’s SG contributions of $7,863.
More precisely, Robert can make before-tax contributions in excess of his $25,000 cap, but if he does, then the excess contributions are hit with extra tax up to his marginal tax rate of 37%, including the 15% tax payable on contribution, plus an interest charge.
Joan: Joan is 63 and earns $120,000 a year running her own fashion business. She also receives income from a transition-to-retirement pension (TRIP). A popular strategy for many over-55s is to take a TRIP which enables you to access your super benefits while you’re still working, and then continue contributing to your super fund. The benefits of such a strategy mean the following:
- if you’re aged 60 or over, you receive tax-free pension payments (if 60 or over), or
- if you’re under the age of 60, you receive concessional taxed pension payments, and
- you can then reduce taxable employment income by entering into a salary sacrificing arrangement, or, if self-employed, by making tax-deductible super contributions.
Before the Government halved the over-50s contributions cap (from $100,000 to $50,000 from July 2009), Joan salary-sacrificed $100,000 (the cap in place before the Government halved the limit) into her super fund, and withdrew tax-free pension payments from her TRIP to replace the employment income (adjusted for the tax that would have been deducted), thereby reducing her tax bill while boosting her super account. Unfortunately, the cut in her annual concessional cap to $50,000 (for over-50s) from July 2009 until June 2012, meant that Joan has had to rethink her TRIP and concessional contribution strategy, dramatically. She still used the strategy for these years but the mix of pension income and business income had to be adjusted.
For the 2012/2013 year, when Joan’s annual concessional cap fell to $25,000, Joan headed to her accountant to ensure she didn’t breach the reduced contributions cap, and to determine whether the salary sacrificing and TRIP strategy was still worth pursuing in her circumstances.
From the 2013/2014 year, Joan’s concessional cap has increased to $35,000 (special cap for over-60s), which means the TRIP and concessional contribution strategy has become slightly more tax-effective than when her concessional cap was only $25,000.
Ten tips when making super contributions
If you’re under the age of 65, you don’t have to be working to make super contributions. If you’re aged 65 or over, however, you must satisfy a work test to make super contributions. I explain the work test and the other contribution rules for over-65s in my article: For over-65s: Ten super tips when making contributions.