Are you looking to get more into super and wondering whether after-tax super contributions are the way to go?
Let’s take a look at after-tax contributions, how they work and the benefits of making these types of contributions into super.
What are After-Tax Super Contributions?
After-tax super contributions are contributions you make into your super account with post-tax income. For example, your employer pays your wage, deducts the relevant PAYG tax, and then directs the remaining amount to your personal bank account. You might then choose to contribute some of this after-tax income as a post-tax super contribution.
The formal name for an after-tax superannuation contribution is a non-concessional contribution.
An after-tax contribution is in contrast to a pre-tax super contribution, also known as salary sacrifice. Salary sacrifice is deducted from your wage prior to PAYG tax being deducted from it.
Related article: Salary Sacrifice Superannuation
After-Tax Super Contributions for Self-Employed
If you are self-employed, you do not have an employer paying you a wage and you are therefore unable to salary sacrifice. Instead you can make contributions to your super fund from your personal bank account. You then have the option of claiming a tax deduction for those contributions, or not, when you complete your personal tax return. If you do claim a tax deduction, they are classified as concessional contributions. If you do not claim a tax deduction, they are non-concessional (or after-tax) contributions.
In fact, even if you are an employee, you are able to make contributions to super from your personal bank account and then claim a tax-deduction for them on your tax return. This can be done instead of, or in addition to, salary sacrifice.
Related article: Superannuation For Self Employed
How Much Can I Contribute as an After-Tax Contribution?
The maximum you can contribute to super as a non-concessional (after-tax) contribution is $110,000 per financial year. This is known as the non-concessional contribution cap. However, you might be eligible to contribute up to $330,000 using the bring-forward rule.
You will need to ensure you are not restricted by any age limitations or total super balance limitations on non-concessional contributions.
The non-concessional contribution cap of $110,000 is higher than the concessional contributions (i.e. SG contributions, salary sacrifice, personal concessional contributions) cap of $27,500.
Can I Claim After-Tax Super Contributions?
As alluded to earlier, you can make after-tax contributions to super and later claim a tax deduction for some or all of those contributions (up to the concessional contribution cap) when you complete your tax return. But, by claiming a tax-deduction, you are effectively converting them from after-tax contributions (non-concessional) to pre-tax contributions (concessional) and they are no longer after-tax contributions.
If you’re keeping up at this point, please give yourself a pat on the back.
Related article: Claiming Deductions For Personal Super Contributions
Why Make After-Tax Contributions?
If you can’t claim a tax deduction for non-concessional contributions, then what is the benefit in making them?
Well, while you can’t claim a tax deduction, there are other types of benefits to making post-tax contributions.
Here’s 5 benefits to making after-tax contributions:
Concessional Earnings Tax
Any amount that you choose to contribute to super will be invested. All investment earnings derived from assets within super are taxed at a maximum of 15%. This compares to being taxed at up to 45% if you invested in your own name, instead.
The compounded tax-savings of investing more of your wealth in super can give you a significantly greater nest-egg at retirement.
If you earn between $40,000 – $55,000 p.a. (approx), you may be eligible to receive a super co-contribution of up to $500 each year simply by making a non-concessional contribution of up to $1,000. The super co-contribution is automatically paid into your super account when you complete your tax return, provided your super fund has your tax-file number on record.
Spouse Contribution Tax Offset
If your spouse earns less than $40,000 for the year and you make a non-concessional contribution into their account, you can receive a spouse contribution tax offset of up to $540. You will need to note on your tax return that you made a spouse contribution.
No Contributions Tax
Unlike concessional contributions which incur contributions tax of 15% upon entering your super account (or 30% for very high income earners), non-concessional contributions enter your super account tax-free, because you’ve already paid personal income tax on this amount before it went into super; hence, after-tax super contributions.
Increase the Tax-Free Component
Your super balance is divided into taxable and tax-free components. All non-concessional contributions count towards the tax-free component and the remainder is the taxable component. All super withdrawals must be made proportionately from each component and when you start an income stream with your super, the taxable and tax-free proportions are locked in. Having a higher tax-free portion can reduce potential withdrawal tax and death benefits tax.
So, are after-tax contributions to super worth it? I’ll let you decide, because your situation is unique to you; but they can be a great, tax-effective way to build your retirement savings (especially if you’ve maximised your concessional contributions), provided you don’t need the funds between now and retirement.