Despite changes to its governing rules, superannuation remains, for most people, a tax-effective environment in which to save for retirement. Here’s a quick Q&A on the ‘what, why and how’ of contributing to superannuation[1] .
Why should I contribute to super?
Most super contributions and the investment earnings within super funds are taxed at a maximum rate of 15%. As this is lower than the marginal tax rate for people earning more than $18,200 per annum, less tax is paid on the money going into your super than if it was paid to you as normal income. The higher your marginal tax rate, the greater the benefit.
What types of contributions can be made?
- Concessional contributions. These are contributions on which you or your employer has claimed a tax deduction. They are taxed at 15% within the super fund. If you earn more than $250,000 p.a. you will be taxed an additional 15% on the concessional contributions above this threshold. Concessional contributions include:
- Compulsory employer (Superannuation Guarantee or SG) contributions. Your employer must pay 10% of your ordinary time earnings to your super fund when you earn more than $450 per month. From 1 July 2022, this $450 per month minimum cap will be removed and the SG contribution rate also increases to 10.5%.
- Additional contributions above the SG made by your employer.
- Salary sacrificed contributions made from your pre-tax income.
- Personal contributions on which you claim a tax deduction.
- Non-concessional contributions. Personal contributions on which a tax deduction has not been claimed, including:
- Personal contributions on which you do not claim a tax deduction.
- Excess concessional contributions retained in superannuation.
- Personal contributions to access government co-contribution of up to $500.
- Spouse contributions. These can generate a tax offset of up to $540 if your spouse earns less than $40,000 pa.
Who can contribute to super?
You can make personal contributions to super if:
- you are under 67 years of age or
- you are aged between 67 and 75 and were gainfully employed (including self-employed) for at least 40 hours over 30 consecutive days during the financial year.
- You meet certain requirements to use the one-off work test exemption.
You can claim a tax deduction for these contributions, but make sure you don’t exceed the $27,500 annual cap for concessional contributions or the $110,000 cap on non-concessional contributions.
Spouse contributions and government co-contributions can only be received up to a certain age provided you meet eligibility requirements.
You are eligible for mandated employer contributions, including Super Guarantee payments, regardless of your age.
How much can be contributed to super?
The maximum you can contribute per financial year as a concessional contribution is $27,500, (increased from $25,000 on 1 July 2021). The unused portion of the cap can be carried forward and used in future years if your total super balance was under $500,000 on 30 June 2021 and certain requirements are met.
The maximum you can contribute per financial year as a non-concessional contribution is $110,000, or $330,000 if a further two years of non-concessional contributions are brought forward.
You cannot make non-concessional contributions in the current year if your total superannuation balance on 30 June 2021 exceeded the general transfer balance cap (the amount that can be transferred to a tax-free pension phase), currently $1.7 million.
Get it right
A successful super contribution strategy can mean the difference between looking forward to retirement and dreading it. This article is provided as an overview. Super is a complex area and further rules apply in some situations. Getting things wrong can be costly so talk to your qualified financial planner and get the right advice based on your personal circumstances on the best ways to boost your super.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
[1] As at May 2022