You probably know that you pay tax on your personal income, but did you know you also get stung for tax on contributions to super.
Well, let me show you how much tax you pay on super contributions, how to avoid super contributions tax and how to make sure you never pay excess contributions tax.
Super Contributions Tax
Superannuation contributions tax is the amount deducted from certain contributions made into your super account, effectively reducing the amount credited to your super account balance.
Super contributions tax is levied by the Australian Tax Office (ATO).
What is Contributions Tax?
Super contributions tax is an amount deducted from all concessional contributions made into your superannuation account.
A concessional contribution is a contribution made to superannuation where the contributor has claimed a tax deduction for making the contribution. Some examples of concessional contributions are employer SG contributions, salary sacrifice contributions and personal concessional contributions.
Super Contributions Tax Rate
The standard contributions tax rate is 15%. This 15% is payable on any contributions made into super that have been classified as concessional contributions.
Making additional contributions to super by way of salary sacrifice or personal concessional contributions will often yield a reduction in overall tax, even after taking into account contributions tax. To calculate the benefit, just figure out the difference between your marginal tax rate and the contribution tax rate.
If you’re a bit of a high-flyer, you will be hit with an additional 15% contributions tax to minimise the effective benefit. Conversely, if you don;t earn so much, or are working part-time, you will receive a refund of contributions tax via the Low Income Super Tax Offset.
Contributions Tax for High Income Earners
In an attempt to equalise the benefits of superannuation between higher and lower income earners, an additional tax of up to 15% is payable if you earn more than $250,000 per year in personal income This is known as the Division 293 tax.
Low Income Super Tax Offset
Unlike the Division 293 tax, which reduces the net tax benefit achieved by higher income earners for contributing to super, the Low Income Super Tax Offset provides an effective refund of contributions tax up to $500, if you earn less than $37,000 in personal income.
The Low Income Super Contribution is automatically paid by the ATO into your super account once you complete and lodge your income tax return, provided your super fund has your tax file number (TFN) on record. You do not need to do anything to receive the Low Income Super Contribution.
Super Contributions Tax Calculator
Superannuation contributions tax is only applied against concessional contributions. There is general contributions tax and Division 293 tax.
General contributions tax is calculated as 15% of all concessional contributions made into your account.
Division 293 tax is assessed applied if your income exceeds $250,000.
This super contributions tax calculator allows you to enter your income and concessional contributions for a year to determine how much contributions tax you will pay. I have included an estimate of the employer SG contributions you should receive from your employer based on your wage (however, it may be different), which you can use to fill in the amount in the concessional contributions field.
Excess Contributions Tax
Excess contributions tax refers to tax payable on contributions that you make to super which exceed your contribution caps.
The amount of excess contributions tax payable depends on whether the contribution is a concessional or a non-concessional contribution.
Excess Concessional Contributions Tax
If you got a bit wild during the year and accidentally exceeded the concessional contribution cap, the excess amount will be taxed at your personal tax rate, minus a 15% offset to account for the contributions tax already paid. You may also need to pay the excess concessional contribution charge (ECCC), which is basically interest on the increased tax you didn’t pay when you were supposed to. It’s the retirement planning version of copping the cane in high school (not that kids these days know what that’s all about!).
You can opt to withdraw the excess contribution amount or leave it within super. However, if you do not withdraw the excess, it will count towards your non-concessional contribution cap, which could cause you to exceed the non-concessional contribution cap and incur excess non-concessional contributions tax.
Excess Non-Concessional Contributions Tax
Contributing too much to super as a non-concessional contribution may result in excess non-concessional contributions tax. However, you will be given the opportunity to withdraw the excess amounts, plus any associated earnings. The earnings will then be taxed as personal assessable income, minus a 15% tax offset.
If you do not choose to withdraw your excess non-concessional contributions, the excess amount will be taxed at the highest individual marginal tax rate (currently 45% plus the Medicare Levy of 2%).
So, there you have it, a comprehensive education on contributions tax. The important point is this: Don’t let contributions tax deter you from making concessional contributions to super, because contributions tax will usually be a lower tax amount than you would otherwise pay if you didn’t make additional concessional contributions to super. But, as always, be sure to check the appropriateness of a contribution strategy with your accountant and financial planner.