There are a number of advantages and disadvantages of non-concessional contributions.
There are two types of contributions that can be made to superannuation: non-concessional contributions and concessional contributions.
Non-concessional contributions are contributions that have been made to a superannuation account with after-tax dollars. That is, a tax deduction has not been claimed for making the contribution or it has not been made with pre-tax income.
Concessional contributions are contributions made to superannuation where a tax deduction has been claimed by the contributor.
For example, a tax deduction will be claimed as a tax deduction by an employer for making mandatory SG or salary sacrifice contributions to an employee’s account. Another example is an individual claiming a tax deduction for a personal concessional contribution made into their own account (sometimes referred to as self-employed contributions). Both of these are concessional contributions.
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The tax-deductibility of concessional contributions is the main reason for making these types of contributions; but what about non-concessional contributions?
What are the benefits of non-concessional super contributions?
Detailed below are the advantages and disadvantages of non-concessional contributions.
Advantages and Disadvantages of Non-Concessional Contributions
Advantages of Non-Concessional Contributions
There are many advantages of non-concessional contributions, including but not limited to:
- No contributions tax is deducted from non-concessional contributions. This is because tax has already been paid at individual tax rates prior to the contribution being made.
- The non-concessional contribution cap of $100,000 per financial year is four-times higher than the concessional contribution cap of $25,000 per year. Allowing you to get more into super
- While under age 65, an individual is able to ‘bring-forward‘ up to two years of the non-concessional contribution cap. This allows $300,000 to be contributed to super at any time over a 3-year period without needing to take into account the annual $100,000 cap. The bring forward rule is triggered in the year that the member’s non-concessional contributions exceed $100,000.
- All non-concessional contributions are classified as ‘tax-free’ components within a super account. Tax-free components are received completely tax-free upon withdrawal in all circumstances, including lump sum withdrawals, income stream (pension) payments and when paid as a death benefit, regardless of the age of the member.
- When a non-concessional contribution is made to superannuation, it is invested within the super account. All earnings received from investments within a super account are taxed at a maximum of 15%. Better yet, capital gains tax is effectively reduced to 10% within super, if the asset sold was owned for longer than 12 months; and, once a super account converts to an account based pension, all earnings are received completely tax-free. The compounded outcome of these tax concessions can significantly increase wealth over time, compared to investing in your own name and being taxed at marginal tax rates.
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Disadvantages of Non-Concessional Contributions
There are also disadvantages of non-concessional contributions, including but not limited to:
- A tax deduction cannot be claimed for making non-concessional contributions to super.
- A non-concessional contribution will not reduce your personal assessable income for tax purposes.
- Any amount contributed to super is not accessible until a superannuation condition of release has been met, such as meeting the definition of retirement or reaching age 65.
- Exceeding the non-concessional contribution cap may result in excess contributions tax and excess contributions charge.
- Changes to superannuation rules in the future may make accessing superannuation harder or more limited.
Maximising Non-Concessional Contributions
Maximising non-concessional contributions can be valuable, especially when nearing retirement.
The reason maximising non-concessional contributions is more prevalent closer to retirement is because these funds aren’t ‘locked up’ in super for too long and the contributor has some comfort in knowing these funds will be accessible in the near future, once a condition of release has been met.
By maximising non-concessional contributions, more wealth can be held in the tax-effective superannuation environment where earnings from investments are taxed at up to 15%. This tax rate can be much lower than individual marginal tax rates.
Upon full retirement, a superannuation balance can be used to start an account based pension, whereby all earnings are received completely tax free.
Non-Concessional Contribution Cap – Under Age 65
The current non-concessional contribution cap is $100,000 per financial year. While under age 65, the ‘bring-forward’ rule can be utilised, allowing total contributions of up to $300,000 at any stage over a 3-year period.
Non-Concessional Contribution Cap – Over Age 65
The maximum non-concessional contributions that can be made by an individual over age 65 is $100,000. A person over age 65 is unable to utilise the ‘bring-forward’ rule.
Non-Concessional Contribution – Work Test Over 65
In order for an individual over age 65 to make contributions to superannuation, they need to satisfy the superannuation work test. The superannuation work test is defined as working at least 40 hours over a 30-consecutive day period in the financial year that the contributions are made and prior to the contributions being made.
However, since 1 July 2018, under the new superannuation rules, retirees aged between 65 and 74 with super account balances below $300,000 are able to make voluntary contributions to super in the first year that they no longer satisfy the superannuation work test.
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Non-Concessional Contribution – Downsizing Over 65
For individuals over age 65, up to $300,000 of proceeds resulting from downsizing a principal place of residence can be contributed to superannuation as a non-concessional contribution without counting towards the standard non-concessional contribution cap, provided the home was owned for at least 10 years.