Cashing in on the co-contribution rules (2011/2012 year)

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 $62,000 a 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. 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.

Note: The income levels for co-contribution eligibility should have been increased for the 2010/2011 and 2011/2012 years but the Government has decided to freeze the income thresholds for these two years. I express my views on this shifty policy measure in the article THE SOAPBOX: Sneaky, sneaky – no indexation in co-contribution income threshold for 2 years.

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 $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.

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 $61,920 for the 2011/2012 year, you then make a non-concessional (after-tax) contribution to your super fund.
2. You lodge your 2011/2012 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.

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