Why make non-concessional contributions to super? This is a common question.
However, it’s important to understand the advantages of non-concessional contributions and the tax benefits associated.
The two types of contributions that can be made to super are non-concessional contributions and concessional contributions.
A tax deduction is able to be claimed for the full amount of a concessional contribution. The tax deduction is claimed by the contributor.
But why make non-concessional contributions?
Why Make Non-Concessional Contributions?
Non-concessional contributions, also known as after-tax contributions, do not provide the contributor with a tax deduction.
However, there are benefits to making non-concessional contributions.
Advantages of Non-Concessional Contributions
The main advantage of why you would make non-concessional contributions is that you are investing your savings in a tax-effective environment (superannuation).
Specifically, all investment earnings (interest, dividends, distributions, rent, income and capital gains) are taxed at a maximum of 15%.
Further, capital gains tax (CGT) is effectively reduced to 10% if the investment sold within super was owned for longer than 12 months.
Compare this maximum tax rate of 15% to the tax rate that would apply on earnings on investments owned in your individual name.
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The compounded benefit of having earnings taxed at only 15%, compared to your individual tax rate, can significantly increase your wealth by the time you reach retirement.
Therefore, the more you can get into super now, the more tax free earnings you can have in retirement – provided you are happy to wait until then before accessing your super.
Other advantages of Non-Concessional Contributions include:
- You can use Non-Concessional Contributions to perform a withdrawal and recontribution strategy
- No contributions tax is payable on non-concessional contributions
- No tax when non-concessional contributions (tax-free component) are withdrawn from super (lump sum or pension income)
- No tax when paid as a death benefit from super
- Can be used to assist in covering life insurance premium costs for policies held within super
Use this calculator to see the benefits of a recontribution strategy.
Disadvantages of Non-Concessional Contributions
The main disadvantage of non-concessional contributions (compared to concessional contributions) is that a tax deduction is unable to be claimed by the contributor for making the contribution.
Another disadvantages of non-concessional contributions include the fact that, once contributed, non-concessional contributions are unable to be accessed until you meet a superannuation condition of release.
Non-Concessional Contributions Cap 2018 / 2019
The non-concessional contribution cap for the 2018 / 2019 financial year is $100,000.
While under age 65, you are able to bring-forward up to two additional years worth of the cap, which means $300,000 can be contributed at any stage over a 3-financial year period without needing to take into account the annual $100,000 cap.
The ‘bring-forward’ rule is triggered in the financial year that an individual’s non-concessional contributions exceed $100,000.
Non-concessional contributions cannot be made to super if you have total superannuation / pension savings exceeding $1.6 million, or if the contribution will cause your balance to exceed $1.6 million.
Non-Concessional Contributions Over 65
Generally, non-concessional contributions can only be made by individuals over age 65 if the superannuation work test is satisfied.
The superannuation work test requires you to have worked 40 hours over a 30-consecutive day period in the financial year that the contribution is made and prior to the contribution being made.
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The bring-forward rule is unavailable for people over age 65.
Home Downsizing Over 65
If you are over age 65, have owned your home for longer than 10 years and decide to downsize, you can contribute up to $300,000 (per person) of the home downsize proceeds to superannuation.
The home downsize contribution is classified as a non-concessional contribution, but does not count towards the non-concessional contribution cap and you do not need to satisfy the superannuation work test to make the contribution.
Excess Non-Concessional Contributions Tax
Should you exceed the non-concessional contributions cap, you have the ability to withdraw the excess and any earnings.
The earnings will then be included in your individual income tax assessment.
Failure to withdraw excess non-concessional contributions and earnings will result in the excess being taxed at the highest marginal tax rate