Why Make Non-Concessional Contributions?

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.

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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.

If you own investments in your own name, all earnings are taxed at your individual tax rate – up to 45% (plus Medicare Levy).

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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.

Furthermore, upon retirement, when you presumably use your super to start a retirement income stream, all earnings are received completely tax free.

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:

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.

There are consequences for exceeding the non-concessional contribution cap.
 

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

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. If you’re looking for more personalised advice, have a chat with one of our experts at www.superguy.com.au/need-advice

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2 Comments

  1. Oz

    Hello Chris,
    Two 56 year olds with the kids now independent we want to retire at 61. We are contributing our full Concessional Contribution amounts to our respective supers. We have spoken to various planners about where to put the $50,000 per year we are currently saving. The Non Concessional Contribution to our supers seems to me to be the best way forward as opposed to suggestions of funds outside super given the 5 year time frame. Your concise explanation of super contributions is appreciated. However, would we be exposing ourselves by not being diversified enough as was suggested by an advisor by having all our eggs in super?

    Reply
    • Chris Strano

      Hi Oz,
      Thank you for your question and kind words.
      From an investment perspective, I wouldn’t say that having all of your money in super lack’s diversification, but it depends on how your super is invested and what investment options are available through your super account.
      From as legislative/regulation perspective, there may be a ‘diversification’ argument – whereby changes in legislation may impact or limit your ability to access super when intended. However, in saying this, my opinion is that it would take a brave government to enforce an immediate or quick change to current super preservation ages. They generally provide lead-in time for such significant changes, as they do not want to risk people being afraid to contribute to super.
      Another thing to consider is ensuring adequate personal cash reserves for emergencies or unforeseen expenses prior to retirement. How much you hold in your personal bank accounts for this purpose is up to you.
      At the end of the day, the main difference between investing in super or not is that investment earnings within super are taxed at a maximum of 15%, compared to your marginal tax rate if invested outside super. The trade-off is that you cannot access your super until certain conditions are met.
      Hope that makes sense and helps.
      Chris

      Reply

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