Superannuation is a great wealth creation tool which can accelerate your financial position due to the great tax breaks that are available.
An important area of superannuation to understand is how to actually get money into the system, these are known as contributions.
We will provide some of the key contribution rules and some handy tips about how to make the most of them.
Contribution rules
Who can make contributions to superannuation (or have contributions made on their behalf). These are mostly linked to your age, and
How much can be put into super during a given financial year without losing some important tax benefits. The limits are known as “contribution caps”.
Contribution caps
Contribution caps are essentially limits on the amount you can contribute into your super fund to maximise the tax benefits. Exceeding these caps is not illegal but can have penalties that apply.
There are two categories that contributions fall into:
Concessional Contributions
These are contributions that receive “concessional treatment” for tax purposes meaning they get taxed at 15% in your super fund. You will know these to be compulsory contributions that your employer makes for you, or money you contribute and claim a tax deduction for.
Concessional contributions are tax deductible to the contributor.
The 2023/2024 cap on concessional contributions is $27,500 increasing to $30,000 from 1 July 2024.
Concessional contributions are taxed at 30% for those who earn over $250,000 pa
Non-Concessional Contributions
These are contributions you personally contribute from your own money which you don’t claim a tax deduction for. These are known as non-concessional contributions because you have already paid the tax on this money and are contributing it into your fund from after tax money. (if you are taxed at 47% tax rate including medicare levy) then those monies have been taxed at a higher rate than would have been in the super fund at 15%.
Non-concessional contributions are not tax-deductible contributions.
The 2023/2024 cap on concessional contributions is $110,000 increasing to $120,000 from 1 July 2024.
There are some exceptions which can either allow you to use more than 1 year’s cap at a time or reduce how much you can use.
Concessional contributions (exceptions)
The concessional contribution cap can be exceeded if you have under used your contribution cap in prior years and you have less than $500,000 in super at 30 June in the prior year.
If your super balance was over $500,000 in the past or grows past that threshold during the year you contribute, you can still contribute if your balance is under $500,000 at the previous 30 June.
These catch-up contributions can allow you to go back 5 years at most from 1 July 2023. You can only carry forward 5 previous financial years, the oldest available unused cap is carried forward first, if you miss contributing any unused cap after 5 years, they expire.
This may be an effective strategy if you sold an investment property and made a large capital gain, you could catch up some contributions and obtain a tax deduction for them reducing any capital gains tax.
Division 293 Tax
If you earn more than $250,000 per annum, you will pay an extra 15% tax on concessional contributions also known as Division 293 tax. This means the total tax you paid will be 30% rather than 15%. (which is still lower than most of the marginal tax rates).
Please contact us to assist you with the calculation of the $250,000 income figure.
Non-concessional contributions (exceptions)
The non-concessional contribution rules also depend on the superannuation balance from the previous 30 June balance.
You can use the “bring forward” rules to catch up 3 years’ worth of caps at once subject to your super balance at prior year 30 June.
Total super balance at June 2023 (prior year) | Non-concessional contributions cap |
|---|---|
$1.9m or more | $ Nil |
$1.79m – less than $1.9m | $110,000 – you can use this years cap but not allowed to bring forward any future year caps |
$1.68m – less than $1.79m | $220,000 – you can use this years cap and bring forward next years as well. |
Less than $1.68m | $330,000 – you can use three years caps at once (this year plus the next 2 years) then have to wait until 1 July 2 years from financial year contribution made. |
You do not have to formally elect to use the bring forward rule, the ATO will automatically apply any excess over normal annual caps against future year caps. Care is needed to contribute appropriate amounts and not to breach the caps otherwise penalties can apply.
Excess concessional contributions
If you go over the concessional contributions cap, you’ll have what is known as an “excess” (anything over the amount of the cap)
If this happens, the ATO will amend your personal tax return for the year the contribution was made to add this excess back into personal income. You’ll be given an extra tax bill. As your super fund has already paid 15% tax on your concessional contributions (including the excess) you get a tax offset of 15% to reflect this but generally there is still more tax to pay.
You will have a choice between paying the extra tax personally and leaving the contribution in your fund. If you choose this option, the excess will count towards your non-concessional contributions cap.
The second choice is to notify the ATO to release the excess out of your super fund. The ATO will then contact your super fund for the money and the fund will hand over 85% of your excess concessional contribution (the other 15% will have already been taken out to pay the usual tax on contributions). The ATO will then take out any extra taxes you owe and give you what’s left over. If you do this, the excess won’t count towards your non-concessional contributions cap.
Excess non-concessional contributions
If you breach your non-concessional contributions cap, the ATO will contact your super fund and get it to pay the excess to the ATO and any “associated earnings”. Associated earnings are like interest notionally building up on the excess contribution, but they use very high interest rates set by the ATO rather than what is actually earned.
The ATO will amend your personal income tax return to include these associated earnings to your income with a tax offset to reflect the 15% tax super funds normally pay on their actual earnings. You will receive what is left over (if any) after extra tax is paid.
If you choose to leave your excess non-concessional contributions in your fund, the ATO will issue your fund a bill for 47% of the excess contribution.
Taxable and Tax Free Components
When super is paid out to you or someone else, it is split between two components:
Taxable
Concessional contributions and all of the fund’s investment earnings go into the taxable component of the fund.
Tax Free
Non-concessional contributions go into the tax-free component of the fund.
Why do components matter?
If you pay out any super after you have turned 60 years old but before you die, you don’t pay any tax regardless of the classification of components, however if your super is paid to anyone but your spouse or minor children when you die, they will pay tax on the taxable component. There are strategies we can assist with to minimise the tax burden in these scenarios. If you wish to know more, please contact us to discuss.
Contributions which don’t count towards these caps
CGT small business contributions
If you sell a business and meet certain conditions, there are special rules that allow you to make extra super contributions known as “CGT small business contributions”.
The current cap in 2023/2024 is $1,705,000 and generally increases each year. We can assist you with accessing these generous CGT small business concessions if you are selling your business and want to boost your superannuation balance.
Downsizer contributions
These are special contributions only available to people above a certain age (see below) who sell their home. There is eligibility criteria to qualify (we will create another article on this or contact us for further information). The cap is $300,000 per person and $600,000 for a couple.
Government co-contributions
Government co-contributions are made by the government to assist you grow your superannuation balance if you make your own non-concessional contributions. You are only eligible if you earn at least 10% of your income from working (eg salary or running a business) had less than $1.9 million in super at 30 June 2023 and meet income requirements.
If you earn less than $43,500 in the year, you will get the maximum co-contribution, it phases out entirely once you earn more than $58,500 in the year.
The government contributes 50 cents for every $1 you contribute (50% return) up to a maximum amount of $500 per year before phasing it out based on income.
Therefore you could contribute $1,000 and get $500 added to your fund, note you will need to fill out specific areas in your tax return to notify the government which we can assist with.
Age requirements for contributions
There are different rules for each contribution type, and they all have age requirements:
Age | Allowed |
Under 18 | People under 18 can make their own non-concessional super contributions but they can only make their own concessional if they working. |
Over 18 | All concessional contributions and non-concessional contributions are available (apart from downsizer) |
55 | From 1 January 2023, downsizer contributions are allowed from your 55th birthday onwards. |
67 | All concessional contributions and non-concessional contributions are available (claiming a tax deduction for personal contributions after 67th birthday is allowed if you meet a * “work test” or meet special exemption. |
71 | Government co-contributions are only possible for those under 71 at end of the year. |
75 | All contributions except downsizer must stop by the 28th day of the month after your 75th birthday. The only exceptions are “mandated” employer contributions. |
To satisfy the work test you need to do paid work (which can include work in your own business) for at least 40 hours in a 30 day period during the financial year.
Contributions that are not cash
It is more common for contributions to be made by transferring cash into the fund. There are some circumstances where you can make a contribution by transferring assets into super you already own, these include listed shares, certain properties and certain managed funds. You will need a self-managed superannuation fund to contribute assets rather than cash.
Timing
Timing your contributions is important to make proper use of the relevant caps and get the tax deduction in the appropriate year. This means the money must have been received by the super fund not merely transferred (which can be delayed by a couple of days).
This is outside of your control in some scenarios such as your employer using a clearing house to pay the superannuation into your fund, there is often delays between paying the superannuation and your fund receiving it which can effect your contribution caps.
Claiming Tax Deductions
If you make a superannuation contribution, it is automatically allocated to be a non-concessional contribution unless you specify otherwise. You need to notify your fund if you wish to claim a tax deduction for the contribution by specific deadlines and they must acknowledge your choice. We can assist you prepare the relevant paperwork to ensure the correct treatment is completed and your deduction is not denied.
Retirement
The tax breaks from getting money into super combined with the power of compounding cannot be understated on the difference this will make to your retirement balance. This trade off requires sacrificing money now which you can not access until you reach retirement which for some may seem very far away.
Congratulations on reading to the end, you can see the rules around superannuation contributions can be complicated. If you are considering making contributions into superannuation, please seek appropriate advice from your accountant or financial adviser so we can help you to ensure compliance and get great results.
We provide expert advice and support to help you establish and manage your SMSF. Contact us today to discuss how we can help you achieve your retirement goals.
Disclaimer
No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is for discussion and education purposes only and the editor is not responsible for the results of actions taken on the basis of information in this publication, nor for any error or omission from this publication. This editor expressly disclaims all and any liability to any person, including reader for any part of this publication.