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When it comes to simple ways to boost your retirement savings, they don’t come much easier than taking advantage of the government’s co-contribution scheme.
If you’re eligible, all you need to do is add a few extra dollars into your super fund and wait for the free contribution from the government to hit your account.
To help you understand the co-contribution scheme better, here’s a simple explainer.
What is a super co-contribution?
The super co-contribution scheme is designed to help retirement savers build their super account balance by providing an additional payment from the government (up to $500) for super contributions you make yourself.
The payments aim to boost the retirement savings of low and middle income earners who make personal (after-tax) contributions into their super account.
The actual amount you receive depends on your income and the size of your personal super contribution. From 1 July 2012 the maximum entitlement was frozen at $500, with the minimum payment being $20. Payment amounts are rounded up to the nearest multiple of five cents.
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How does the scheme work?
The following case studies show how the co-contribution scheme works in real life:
Case study 1
Mario works as an administrative assistant for a charity and his annual salary is $34,000. He meets all the eligibility requirements to receive a co-contribution payment.
From his take home pay, Mario makes a personal contribution of $35 each fortnight into his super account. These contributions totalled $910 during the 2019/20 financial year.
With this personal super contribution, Mario is eligible for a co-contribution amount of $455.
The ATO will pay $455 directly into Mario’s super account in December 2020.
Case study 2
Hussein is 45 years old and works as a delivery driver for a medical company. His annual salary is $52,000 and he also receives $5,000 in investment income from a property he jointly owns with a family member.
Hussein plans to make personal super contributions into his super account totalling $10,400 during 2020/21.
Hussein will not be eligible to receive the super co-contribution in 2020/21, however, as his total income (assessable income plus reportable fringe benefits) is higher than the maximum income threshold, which is $54,837.
Who is eligible for a co-contribution?
To ensure the government doesn’t give away too much free money, it has set eligibility criteria that you must meet when you lodge your tax return. You only receive a co-contribution payment if you:
- Made eligible personal super contributions during the financial year
- Pass two income tests (income threshold and 10% eligible income test – see Income Tests 1 & 2 below)
- Are aged less than 71 at the end of the financial year
- Are not a temporary visa holder
- Have lodged your tax return for the relevant financial year
- Have a Total Superannuation Balance (TSB) under $1.6 million at the end of the previous financial year
- Have not contributed more than your non-concessional contributions cap ($100,000 in 2019/20 and 2020/21).
Need to know
You are not entitled to a co-contribution payment for any super contributions you have claimed as a tax-deductible super contribution.
Checking the income test thresholds
As noted above, you need to pass two income tests to qualify for a co-contribution payment:
Income Test 1
There are two income thresholds for the co-contribution:
- Lower threshold ($39,837 for 2020/21)
- Higher threshold ($54,837 for 2020/21)
If your total income is equal to or less than the lower threshold and you make personal contributions of $1,000 into your super account, you will receive the maximum co-contribution of $500.
When your total income is between the two thresholds, the amount of co-contribution you receive tapers away as your income increases, falling to $0 when your income reaches the higher threshold.
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Need to know
The ATO works out your total income for co-contribution purposes by adding together your assessable income and any reportable fringe benefits for the financial year, plus any extra super contributions made by your employer over their compulsory contributions (reportable employer super contributions). Any allowable business deductions are then taken away from the total.
Income Test 2
At least 10% of your total income must come from employment and/or carrying on a business. This can be salary and wages, business income as a sole trader or partnership, and director fees.
Income from a non-business partnership, interest, rent and dividends, or employment termination and lump sum payments are not eligible income under this test.
Under this test, your total income is not reduced by any allowable business deductions, to ensure people who are self-employed are not disadvantaged during a low income or profit financial year.
Co-contribution income thresholds
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What super contributions are eligible for a co-contribution payment?
Personal super contributions eligible for a co-contribution payment can be made from your after-tax or take-home pay. They are in addition to any Superannuation Guarantee (SG) amounts made by your employer, but do not include any salary-sacrifice payments you make.
Your personal super contributions can be made either as a single lump sum or spread throughout the financial year. The total amount you contribute is used to calculate the co-contribution amount, so ensure all your personal contributions reach your super fund before 30 June each year to ensure they are counted for that financial year.
If you have claimed a tax deduction for your personal super contributions (for example, if you are self-employed and make your own super contributions and claim them as a deduction in your income tax return), you will not be entitled to a co-contribution payment for those personal super contributions.
Good to know
The co-contribution is not taxed when it is paid into your super account and you don’t have to include it as income in your annual tax return.
Investment earnings on your co-contribution are taxed in the same way as other investment earnings you receive in your super account.
Any co-contribution amounts are preserved in your super account and can only be accessed when you meet a condition of release such as retirement.
5 tips and traps with the co-contribution
There are a few traps to be wary of when it comes to the co-contribution:
- Keep your Total Superannuation Balance (TSB) below the threshold. If your TSB at 30 June of the year before the financial year in which you make your contributions is greater than or equal to $1.6 million, or you go over your annual non-concessional (after-tax) contribution cap during the relevant financial year, you won’t be eligible for a co-contribution payment.
- Watch your personal super contributions. To be eligible for a co-contribution, your personal contributions must not be claimed as income tax deductions. Since 2017 taxpayers can claim personal super contributions as tax deductions, so you need to take care in this area.
- Ensure your super fund has your TFN. It’s important to check if your super fund has your tax file number (TFN), as your super fund cannot accept co-contribution payments from the ATO if your TFN is not on file.
- Lodge your income tax return. The ATO uses your tax return to work out your total income to determine eligibility for the co-contribution, so if you don’t lodge a return you may not receive the right – or any – amount of co-contribution. This is particularly important if your income is from sources other than normal employment, such as a partnership or director fees.
- Don’t go over your non-concessional cap. You will not qualify for a co-contribution if you have exceeded your non-concessional (after-tax) contributions cap during the financial year ($100,000 in 2020/21).
How your co-contribution is paid
To make things easy, the ATO does everything for you when it comes to a co-contribution payment. Once you lodge your annual tax return, it decides if you are eligible and automatically pays the correct amount into your super account.
Payment is normally between November and January for personal contributions made during the previous financial year. The super fund credits the payment to your super account and it appears on your next member statement.
Generally, the ATO pays the co-contribution directly into the super fund that received your personal super contributions. If you want your co-contribution paid into a particular fund, you need to complete a superannuation fund nomination form and send it to the ATO before lodging your annual tax return.
You can also receive your co-contribution payment directly if you:
- Have retired and no longer have an eligible super account that will accept the co-contribution
- Were retired but return to work and don’t have an eligible super account
- Are the legal representative of the super account holder who is now deceased.
To request a direct payment you need to complete an Application for payment of ATO-held superannuation money or lodge a request using the online myGov portal.
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