Super for beginners, part 3: Why aren’t my super contributions tax-free?

Q: I checked my statement and I put an extra $10 per week into my super and each time an amount is put in, it has been taxed. Is this right? I thought that my contributions were tax-free?

A: I’m not certain if you’re asking:

• whether you pay any tax at all when you use your income to make super contributions.
• whether you pay tax on super contributions when these contributions enter a super fund, or
• whether you pay tax on your income before you make super contributions

In any case, I will ensure that I answer all of these questions.

The deal with super contributions is that tax is usually paid on that money at some stage (by you or your super fund account), unless you don’t pay tax on your personal income and you make an after-tax contribution. For example, an individual who may not pay income tax on personal income is someone who has a taxable income of less than $20,542 (for the 2012/2013 year).  The tax-free threshold applies on the first $18,200 of your income, and you will be able to earn up to $20,542 (from the 2012/2013 year) before any income tax is payable, when taking into account the Low Income Tax Offset. Contact the ATO, or chat to your accountant for more information on the income tax rates.

If you make a non-concessional contribution, that is, an after-tax contribution, you are making a contribution from your after-tax money. If you’re an employee, then typically your employer deducts PAYG tax instalments, and then your pay goes into your bank account, and then a contribution is made from that bank account, or your employer makes that payment for you. In these circumstances, no additional tax should be deducted upon entry into the super fund because such contributions are treated as non-concessional contributions. For a contribution to be treated as a non-concessional contribution however, the super fund must be aware that it is a non-concessional contribution. You can find more information on this type of contribution by reading Your 2012/2013 guide to non-concessional (after-tax) contributions.

If you choose to make a concessional (before-tax) contribution, then the super fund deducts a 15% ‘contributions’ tax from the contribution upon entry into the fund. In the past, if you were paying less than 15 cents in the dollar tax on your personal income, then concessional contributions were not considered a tax-effective option. Since 1 July 2012, if you earn less than $37,000 a year, and you, or your employer makes concessional (before-tax) superannuation contributions on your behalf, then 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)

Concessional contributions include your employer’s Superannuation Guarantee payments, additional employer contributions, any salary sacrificed contributions and tax-deductible super contributions (if eligible). You can find more information on this type of contribution by reading Super concessional contributions: 2012/2013 survival guide.

Note: If you intended to make after-tax contributions, and the super fund has treated them as concessional (before-tax), then you need to chat to your super fund to resolve this matter.