- 5 reasons why non-concessional contributions can make sense
- Am I eligible to make non-concessional contributions?
- What counts towards your non-concessional contributions cap?
- How do I make a non-concessional contribution?
- Using a super fund reserve: the tax man is watching
Most employees know their employer is helping to build their retirement savings by making regular contributions – like the Super Guarantee (SG) – into their super account as part of their salary package. These contributions are taxed concessionally – or at a special low rate – of 15% to encourage Australians to save for their retirement.
But that’s not the only way to top up your super account. You can also make contributions into your super account from your take home pay or money outside the super system. Since these contributions have already been taxed at your normal tax rate before you contribute them to your super account, they are not treated concessionally and so are called non-concessional contributions.
To make the tax position of non-concessional contributions clear, they are sometimes referred to as ‘after-tax’ or ‘undedicated’ contributions, because tax has already been paid or deducted from the money used to make the contribution.
Note: There is no 15% contributions tax payable on non-concessional (after-tax) contributions when they are added to your super account, because you have already paid tax on this money.
There are two main types of non-concessional (after-tax) contributions:
- Personal contributions you make as a super fund member and don’t claim as a tax deduction in your income tax return. These are often called ‘voluntary’ contributions and can be either a large lump sum or small regular amounts from your wages or salary.
- Spouse contributions are made directly into your spouse’s super account. This can be a tax-effective way for a couple to save for retirement if one partner is only working part-time or has a low income. They can also help to balance the amount you and your spouse have in super and can equalise your retirement income.
For more about spouse contributions, see SuperGuide article Contribution splitting: How to boost your spouse’s super.
Jenny is aged 43 and earns an annual salary of $90,000 as an office manager. Her Total Superannuation Balance is currently $850,000.
Jenny owns a share portfolio currently valued at $55,000 and she would like to use this money to help grow her retirement savings.
Jenny decides to sell her shares and move the money into the lower taxed environment of her super account. She pays some capital gains tax (CGT) on the profits she has made when selling the shares and decides to deposit $49,500 into her super account as a non-concessional (after-tax) contribution. Jenny then invests in a broadly diversified range of shares within her super account.
Despite paying CGT, over the long-term Jenny benefits from paying a lower tax rate (15%) on the investment earnings from the shares in her super account than the one applying to investment earnings outside the super system. When she eventually retires after age 60, she will be able to receive her non-concessional contribution money tax-free.
5 reasons why non-concessional contributions can make sense
The main reason people decide to make non-concessional (after-tax) contributions is to enhancement the balance of their super account at retirement. Some of the other advantages include:
1. No contributions tax
When you make non-concessional contributions with your after-tax money, there is no 15% contributions tax payable when they enter the super system.
2. Lower tax on investment earnings
The tax rate on the investment earnings you receive on savings in your super account is a maximum rate of 15%, which is often a lot less than the tax rate you pay on income and normal investment earnings. This low tax rate can make investing through the super system quite attractive.
3. Tax-free withdrawal
When you receive your super savings in retirement, your non-concessional (after-tax) contributions are returned to you completely tax-free, in the form of a lump sum payment or as an on-going income stream.
4. Higher contributions cap
The current non-concessional (after-tax) contribution cap ($100,000 in 2018/2019) is much higher than the concessional contributions cap ($25,000 in 2018/2019), which allows you to have more savings in the lower taxed environment of the super system.
5. Potential government co-contribution payment
If you make a personal after-tax contribution, you may qualify for a co-contribution payment into your super account of up to $500 (2018/2019) from the government.
Note: From 1 July 2017, to be eligible for a co-contribution payment from the government, you must not have exceeded your non-concessional contributions cap in the relevant financial year.
Am I eligible to make non-concessional contributions?
To make a non-concessional contribution into your super account, you must meet several eligibility criteria:
1. Total Superannuation Balance limit
You must have a Total Superannuation Balance (TSB) of less than the Transfer Balance Cap ($1.6 million in 2018/2019) on 30 June of the previous financial year. You also need to have available space under your non-concessional contributions cap based on the contributions you have made in previous years (see Bring-forward arrangements section below).
If your TSB was $1.6 million or more on 30 June of the previous financial year, you will not be able to make any non-concessional (after-tax) contributions in the current financial year without triggering an excess contribution and paying additional tax on the contribution.
2. Check the age limits
If you are aged under 65 at the start of the financial year, you are eligible to make a non-concessional (after-tax) contribution, even if you are not working.
You may also be able to bring-forward two additional years of non-concessional (after-tax) contributions so you can make a higher contribution in a single year (up to $300,000 in one year). The amount you can bring-forward depends on your Total Superannuation Balance. For more information, see SuperGuide article A super guide to understanding the bring-forward rule.
Annual contribution limits for non-concessional contributions using a bring-forward arrangement
|Total superannuation balance||Maximum
|Accounts for contribution caps in|
|$0 – $1.4 million||$300,000||Current year + following 2 years|
|$1.4 – $1.5 million||$200,000||Current year + following year|
|$1.5 million – $1.6 million||$100,000||Current year|
|$1.6 million and over||Nil||Current year|
Once you reach age 65, your non-concessional contributions cap is a flat $100,000 a year (and you need to meet the requirements of the work test), because the bring-forward arrangements are generally not available to people aged 65 and over. For more information, see SuperGuide article Work test: Making super contributions over 65.
Once you reach age 75, you generally cannot make non-concessional contributions – even if you are still working.
The government has introduced a one-year exemption from the work test to allow new retirees to boost their super account if their TSB is below $300,000.
The one-year exemption from the work test covers both concessional and non-concessional contributions, although the normal annual contributions caps still apply. For more information, see SuperGuide article Work test: Making super contributions over 65.
3. Remain under the contributions cap
From 1 July 2017, the annual cap or limit for non-concessional (after-tax) contributions is $100,000 (2018/2019). This cap increases in line with indexation of the concessional (before-tax) contributions cap.
Non-concessional contributions cap in 2018/2019
|Total Superannuation Balance* on 30 June 2018||Amount you can contribute||Contributions tax payable|
|Under $1.6 million||
|Over $1.6 million||Nil||47% if left in super account|
*Total Superannuation Balance includes all concessional contributions and reportable fringe benefits.
Non-concessional contributions caps in previous financial years
|Income year||Amount of cap*|
* These caps are subject to any bring-forward arrangements commenced in early years
For more information, see SuperGuide article What to do if you exceed your super contributions caps
What counts towards your non-concessional contributions cap?
When calculating your annual non-concessional contributions, the ATO doesn’t just consider your personal and spouse contributions. It also counts the following contributions:
- First Home Super Saver Scheme (FHSSS) – Under this scheme you can make both concessional (before-tax) and non-concessional (after-tax) contributions, and the non-concessional component will be included in your non-concessional contributions cap. For more information, see SuperGuide article 10 point guide to First Home Super Saver Scheme
- Excess concessional contributions – If you go over your concessional (before-tax) contribution cap ($25,000 in 2018/2019), the excess contributions are counted towards your non-concessional (after-tax) contributions cap.
Note: If you are aged over 65 and sell your home, you can make a Downsizing contribution of up to $300,000 into your super account in a financial year. Although these contributions are considered non-concessional (after-tax) contributions, they are not counted towards your annual non-concessional contribution cap. For more information, see SuperGuide article Downsizer contributions: How do they work and what are the current rules?
How do I make a non-concessional contribution?
Making a non-concessional (after-tax) contribution is easy, with most super funds allowing you to make them using payment systems like cheque, Bpay or electronic funds transfer. Normally, you either log into your super account, or fill in a form and post the cheque to your super fund.
You can make a non-concessional contribution as a single lump sum or as lots of smaller contributions throughout the year – it’s up to you.
Also, you don’t need to notify the ATO that you are making a non-concessional contribution, since most super funds usually assume voluntary member contributions are non-concessional (after-tax) contributions unless you inform them otherwise. If you intend to claim a tax deduction for a personal contribution and have it classed as a concessional (before-tax) contribution, you need to complete a Notice of Intention to Claim a Personal Tax Deduction form and send it to your super fund.
Note: You cannot claim a tax deduction for personal contributions you want to keep as non-concessional (after-tax) contributions.
Using a super fund reserve: the tax man is watching
As non-concessional (after-tax) contributions can be tax effective, the ATO takes a very close interest in these types of super contributions.
It’s worth remembering that super funds – especially SMSFs – cannot use their reserve accounts to get around the annual caps on non-concessional contributions.
The ATO has made it clear it takes a very dim view of these types of activities and will use its extensive powers under Part IVA of the Tax Act if it deems a tax benefit has been obtained by using a super fund reserve to reduce your TSB in order for you to make a non-concessional contribution without breaching your contribution cap. The tax benefit is due to the earnings on these contributions being taxed at a lower rate than would have been if they were held outside the super system.