Concessional contributions are the unsung heroes of Australia’s retirement system. We reap the benefits of them every day without truly appreciating the beauty they behold.
Yet, while my love for concessional contributions is strong, I always keep in mind their hidden downsides. And you should too…
What Are Concessional Contributions?
Concessional contributions are contributions made into your superannuation account where a tax deduction has been claimed by the contributor in respect of that contribution.
Concessional contributions are usually made into your super account by your employer, or by you personally.
Understanding what concessional contributions are and how they work will provide you with the means to build wealth for retirement in a tax-effective environment, while simultaneously reducing your personal income tax.
Types of Concessional Contributions
There are three main types of concessional contributions: superannuation guarantee (SG) contributions, salary sacrifice super contributions and personal concessional contributions.
Superannuation Guarantee (SG) Contributions
Superannuation guarantee contributions are the mandatory contributions your employer must make into your super account on your behalf. The amount your employer must contribute is generally equal to 9.5% of your wage or salary; however, some employees may receive a higher amount based on their employment agreement.
If your boss is a bit on the dodgy side, you might want to double check these SG contributions are actually going into your account.
SG contributions are classified as concessional contributions because your employer claims a tax deduction for the contribution as a business expense.
Salary Sacrifice Contributions
Salary sacrificing into superannuation is an arrangement whereby you agree with your employer to forfeit part of your wage in exchange for equivalent increased super contributions. Not only does this increase your retirement savings, but it also reduces the amount of wage that is taxed at your individual marginal tax rate. Ka-ching.
Again, salary sacrifice contributions are concessional contributions because your employer claims a tax deduction for the contribution, just as they would if they paid the same amount to you as a wage.
Personal Concessional Contributions
A personal concessional contribution is a contribution you make into your super account from your bank account. You then notify your super fund that you intend on claiming a tax deduction for it and subsequently claim a tax deduction for it when you complete your tax return.
Who Can Make Concessional Contributions?
You can make salary sacrifice contributions and personal concessional contributions to super at any age under 75. If you are over age 65, you will need to satisfy the superannuation work test (or recently retired rules) before making personal concessional contributions.
Any person of any age can receive SG contributions.
Concessional Contribution Limits
The concessional contribution cap is $25,000 per person, per financial year. All types of concessional contributions count towards this cap.
You are able to carry-forward any unused portion of your concessional contribution cap each year, from the 2019 financial year onwards, for a period of 5 years. However, you are only able to utilise the carried-forward amount if your total superannuation balance was less than $500,000 on 30 June of the previous financial year.
For example, if your total concessional contributions in the 2019/20 financial year were $20,000, then you would be able to carry-forward the unused $5,000 for 5-years and, for example, could contribute up to $30,000 in the 2020/21 financial year if your super balance was below $500,000 on 30 June 2020.
The carry-forward rule is the only exception for being able to exceed the $25,000 concessional contribution cap within a financial year.
Advantages of Concessional Contributions
The benefit of making or receiving concessional contributions into your super account is that you are increasing the savings held within the tax-effective superannuation environment. The contributions are invested within your super fund and all investment earnings are taxed at a maximum of 15%. This could be a lower tax rate than if you invested the same amount in your personal name.
Furthermore, by making salary sacrifice or personal concessional contributions into super, you are reducing the level of taxable income in your own name, meaning you pay less personal income tax.
Disadvantages of Concessional Contributions
The downside of making concessional contributions into super is that these funds are inaccessible until you meet a superannuation condition of release, such as retirement or reaching age 65. So, if you make additional contributions, such as salary sacrifice or personal concessional contributions, you want to make sure it doesn’t leave you short.
Another consideration is that all concessional contributions are taxed at 15% upon entering your super fund – increasing up to 30% for very high income earners.
You also need to be mindful that any amount contributed to super will usually be invested and therefore exposed to investment risks such as capital fluctuations and market volatility.
An important, yet lesser known aspect of concessional contributions, is that these contributions count towards the taxable component within your superannuation balance. The significance of this is that the taxable component is assessable for tax when received as pension income under age 60, and may incur tax if received as a lump sum under age 60. Also, death benefits tax of 15% (plus Medicare) is payable on the taxable component portion of a balance paid to a non-tax dependent (e.g. adult child) in the event of death.
Excess Concessional Contributions
If you exceed the concessional contributions cap in any one financial year, the excess amount will be included as assessable income in your personal tax return, minus any contributions tax already paid.
You could also be liable to pay the excess concessional contributions charge, which seeks to charge you for interest on the late additional income tax payment resulting from the excess contributions.
You can apply to have the excess contribution amount refunded to you. If you do not opt to have the excess contributions refunded to you, it will remain within your super account and count towards the non-concessional contribution cap. This could cause you to also exceed the non-concessional contribution cap, which would then result in excess non-concessional contributions tax.
What Are Non-Concessional Contributions?
Non-concessional contributions are contributions made to superannuation where a tax deduction is not claimed for the amount contributed. Non-concessional contributions are after-tax contributions made from your personal bank account into superannuation.
What is the Difference Between Concessional and Non-Concessional Contributions?
The table below compares the major difference between concessional and non-concessional contributions.
|Tax deduction claimed by contributor?||✔️||❌|
|Incurs contributions tax?||✔️||❌|
|Added to taxable component?||✔️||❌|
|Added to the tax-free component?||❌||✔️|
|Subject to withdrawal tax under age 60?||✔️||❌|
|Subject to death benefits tax?||✔️||❌|
|Eligible for super co-contribution?||❌||✔️|
|Eligible for spouse contribution tax-offset||❌||✔️|
|Can be spouse-split||✔️||❌|
Basically, if you are paying personal income tax at a level above 15%, making additional super contributions in the form of salary sacrifice or personal concessional contributions can provide immediate and long-term tax benefits, assuming you won’t need the money before now and retirement.