Contributions made to superannuation where a tax deduction has been claimed incur superannuation contributions tax.
Contributions where a tax deduction has been claimed are referred to as Concessional Contributions.
The types of contributions that are assessed as Concessional Contributions include salary sacrifice contributions, employer contributions and personal deductible contributions.
In some cases, contributions tax on concessional contributions can be as high as 30%.
This is something that needs to be considered when determining the benefit of making additional tax deductible contributions into superannuation.
It may even be something that you take into account when negotiating a salary package.
What is the standard tax on concessional contributions?
In most cases, the tax rate on concessional contributions will be a flat 15%.
So, for example, if you are an employee and have a salary of $60,000 p.a. and your employer makes mandatory superannuation guarantee (SG) contributions into your superannuation account for you, at the current required rate of 9.5%, then they would need to contribute $5,700 p.a. into superannuation for you – in addition to the salary that is paid into your personal bank account. However, of the $5,700 that they pay into your account, only $4,845 would actually be paid into your super account, because superannuation contributions tax of 15% would be deducted first.
The reason that superannuation contributions tax is deducted from this contribution is because it is a Concessional Contribution. The reason SG Contributions are assessed as a Concessional Contribution is because your employer claims a tax deduction for the contribution.
If you are a self-employed person earning $60,000 p.a., you obviously do not receive employer contributions. Instead you are able to choose whether or not you make any contributions to superannuation. If you do decide to make personal deductible contributions, which is a form of Concessional Contribution, these contributions will also incur contributions tax.
30% Tax On Super Contributions
So, who will get slugged with a 30% tax on their superannuation contributions?…. and why?… and when?
A new tax, known as the Division 293 tax, was introduced in the 2012-13 financial year. The government saw a disparity between the tax benefits received by a high-income earner compared to us everyday folk when making salary sacrifice contributions or personal concessional contributions.
You see, if someone earning $80,000 makes salary sacrifice contributions into superannuation, they are essentially reducing the tax on the amount sacrificed by 19.5% – the current difference between their highest marginal tax rate (plus medicare) (34.5%) and the superannuation contributions tax rate of 15%.
However if, without the application of Division 293, a person earning $350,000 p.a. makes salary sacrifice contributions into superannuation, they are essentially reducing the tax on the amount sacrificed by 34% – the current difference between their highest marginal tax rate (plus medicare and budget repair levy) (49%) and the superannuation contributions tax rate of 15%.
As you can see, the higher income earner receives a greater tax benefit and, arguably, are less likely to need it.
Application of Division 293 and 30% Tax
Therefore, the Government announced the Division 293 Tax which, as of 2012/13, reduced this effective tax concession for individuals earning more than $300,000 p.a. This is achieved by applying an additional 15% contributions tax to individuals earning more than $300,000 – meaning such individuals actually pay 30% contributions tax in total.
But, if you’re one of these high-rollers who have managed to sneak under the $300,000 threshold, don’t be so quick to laugh.
30% Tax On Super Contributions – Post 1 July 2017
As of 1 July 2017, the Division 293 Tax high income threshold is being reduced from $300,000 down to $250,000.
And don’t think you can salary sacrifice your way out of the tax; because your income, when assessing the Division 293 Tax, disregards any reportable superannuation contributions and includes all low-tax super contributions. This basically means that salary sacrifice contributions are added back to your taxable income and that is the figure used to see if you exceed the threshold. Click here for the income test.