There are two superannuation contribution types
- Concessional contributions (CCs)
- Non-concessional contributions (NCCs)
Quick Links
Concessional contributions
Non-concessional contributions
How to make voluntary super contributions
Benefits of voluntary super contributions
Downsides of voluntary super contributions
Concessional contributions (CCs)
Concessional contributions are contributions where you get a deduction on your personal income tax for the amount you contribute, and then 15% tax is withheld by the superfund instead. So you are taxed concessionally at 15% instead of your marginal tax rate (plus 2% Medicare levy) of 32%, 39%, or 47%.
Let’s look at an example.
Say you are on the 32% marginal tax rate (including the 2% Medicare levy) and are considering adding $10,000 of your pre-tax salary into super for the tax deductions.
What you could get is either:
- Outside super (32% tax): $6,800 after tax
- Inside super (15% tax): $8,500 after tax
You get an extra $1,700 from contributing to super.
Considering you would only have received $6,800 after tax, you are getting a herculean $1,700/$6,800 = 25% more money added to your retirement savings with concessional contributions.
That 25% becomes:
- 39.34% for those on the 39% marginal tax rate (including the 2% Medicare levy)
- 60.38% for those on the 47% marginal tax rate (including the 2% Medicare levy) *
Returns from the stock market are about 10% p.a. on average, so that’s equivalent to 2.5 years of average market returns (or 4 years for someone on the 37% MTR). And unlike market returns, this return is 100% risk-free.
Do this year in and year out, and it’s not hard to see how your retirement savings can grow at a phenomenal pace.
* if your income and concessional contributions exceed $250,000, div293 may apply, potentially making it 32.08%
Concessional contributions include:
- employer contributions
- salary sacrifice
- personal direct contributions where you have claimed the tax deduction.
Employer contributions are compulsory. The other two contributions are voluntary.
Who can make concessional contributions
Anyone under age 75 can make voluntary concessional contributions, however:
For those aged under 18 or 67-75, you must satisfy the work test or work test exemption to claim a tax deduction on personal contributions and convert it to a concessional contribution.
- The work test is satisfied when you work at least 40 hours during a consecutive 30-day period each income year.
- The work test exemption allows a contribution in the year following retirement and can be used only once. To satisfy the exemption:
- the work test must have been satisfied in the year preceding the contribution
- the total super balance at the end of the previous financial year must be under $300,000
- cannot have been used previously.
For those aged under 18 at the end of the income year that the contribution is made, you can only claim a tax deduction if you also earned income as an employee or business operator during the year.
What is the concessional contribution cap
There is a cap (or limit) on how much you can contribute concessionally per year of $30,000 p.a.
The concessional cap increases in line with average earnings (AWOTE) in $2,500 increments.
Your compulsory employer contribution to super forms part of this limit. So if your employer contributes $10,000 p.a., you will have $20,000 remaining in your CC limit for voluntary contributions.
You can also use unused concessional contributions for up to the past five years under the carry-forward rule provided your total super balance on June 30 of the previous financial year was below $500,000.
Exceeding the concessional contribution cap
The ATO automatically calculates your available cap, and if you exceed the cap and any carry-forward amounts, they send a letter with the option of either releasing the excess or leaving it in there and having it automatically become a non-concessional contribution.
The excess above your cap is included in your personal tax return as assessable income, where you pay tax at your marginal tax rate but with a 15% tax to offset the tax paid on the contribution by your super fund. You can withdraw up to 85% to help pay for the remaining tax or leave it in there and pay the additional tax from other money you have outside of super.
If you leave the excess in and it becomes a non-concessional contribution, and if your Total Super Balance exceeded $1.9m on June 30 of the previous financial year or if you exceed your allowable non-concessional contribution limits (making you ineligible to make non-concessional contributions), you will either need to release the excess (and associated earnings) or pay 47% tax.
When not to make concessional contributions
Since concessional contributions are taxed 15% by your super fund, if your marginal tax rate is below 15% (i.e., your total taxable income is below $22,575), making a concessional contribution will mean paying more tax, so don’t do that. Don’t worry about your employer’s compulsory super guarantee — you get a tax offset for this (this is automatic, so there is nothing for you to do).
Even those on the 18% marginal tax rate (including the 2% Medicare levy), which is a taxable income up to $45,000, only get a small benefit of concessional contributions with only a 3% tax savings for locking up the money until retirement age, so it is worth considering whether it is better to contribute it later when you are nearer to preservation age, especially since you can use unused concessional contributions for up to the past five years under the carry-forward rule provided your total super balance on June 30 of the previous financial year was below $500,000.
Salary sacrificing with HECS/HELP debt
When you salary sacrifice, your employer withholds tax and your HECS/HELP debt based on your new lower salary after your salary sacrifice amount has been taken out of your gross income. However, your income for calculating HECS/HELP debt includes voluntary concessional contributions, so if you don’t account for this, you’ll get a nasty bill to the ATO when your tax return is processed.
To avoid this, consider working out your HELP repayment component manually for both including and excluding your salary sacrifice amount (see paycalculator.com.au), get the difference per pay cycle, and ask your employer to withhold that amount from each pay as an upward variation.
Non-concessional contributions (NCCs)
Non-concessional contributions are personal (after-tax) contributions that you don’t claim or get a deduction on.
These do not incur the 15% tax by the super fund when it is added because you would then be paying tax twice.
Who can make non-concessional contributions
To be eligible to make a non-concessional contribution, you must:
- be under 75 (but contributions may be accepted no later than 28 days after the month in which you turn 75), regardless of whether you are working or not.
- have a total super balance at the end of 30 June of the previous financial year that is less than the Transfer Balance Cap ($1.9 million). *
* You can have slightly below the $1.9m TBC and still make a full $120,000 contribution, bringing your Total Super Balance to almost $120,000 over the TBC.
What is the concessional contribution cap
The cap on NCCs is 4 times the CC limit — currently $120,000 p.a.
You can also use the bring forward arrangement and add up to two additional years to put in up to $360,000 at once.
Exceeding the non-concessional contribution cap
Your non-concessional contributions are the sum of your personal non-concessional contributions (including any non-concessional contributions made to receive the government co-contribution and any recontributed amounts), excess concessional contributions that you elected not to withdraw, and spousal contributions.
You may be eligible for the bring-forward arrangement where you can contribute up to 3 years worth of non-concessional contributions.
If you exceed your non-concessional contribution cap (after allowing for the bring-forward arrangement), you can elect to withdraw the excess or leave it in your super account. This election must be done via the ATO after waiting for them to send you an excess NCC determination. If you leave it in your super account, you pay 47% tax, and since non-concessional contributions are after-tax contributions, you will be paying this tax in addition to having already paid tax at your marginal tax rate, so you are effectively taxed twice.
Considerations on whether to make non-concessional contributions
NCCs miss out on the first (and most significant) benefit of super – the immediate tax savings on entry to super. However, they still have the other two benefits – a lower tax rate on earnings each year during accumulation and a zero tax rate after converting to an account-based pension in retirement.
In general, if you have not used all your CC limit, it will be better to make your contributions concessional rather than non-concessional to get the added benefit of a tax deduction on entry to super. However, there are a couple of circumstances where you would choose to make a NCC over a CC.
The first is if your tax rate is lower than the 15% contribution tax and 15% ongoing earnings tax within super – for instance, a stay-at-home parent under the tax-free threshold. In that case, you can avoid paying 15% tax by making your contribution non-concessional (i.e., not lodging an NOI).
Another is to get the government super co-contribution, where a low or middle-income earner makes a personal (after-tax) contribution to their super fund, and the government may also make a contribution (called a co-contribution) up to a maximum amount of $500.
How to make voluntary super contributions
The two ways to add voluntary payments to super are:
- Salary sacrifice — asking your employer to automatically take some of your salary and add it to your regular employer super contribution), and
- Personal contribution — transferring money directly to your super account.
Salary sacrifice is also referred to as a pre-tax contribution since it is taken out before it is taxed.
Personal contributions are also referred to as post-tax contributions since you contribute it after tax has been paid.
With the after-tax contribution, provided your total concessional contributions (voluntary contributions plus employer contributions) are within the concessional cap of $30,000, you can claim the tax deduction and turn it into a pre-tax contribution. To do this:
- the money must be in your super account before the end of the financial year (most super funds require a week before the end of the financial year for processing); and
- you must lodge an NOI form (Notice Of Intent to claim a tax deduction) with your super fund before you lodge your tax return (or by the end of the following financial year, whichever is earlier), and you will need to receive written acknowledgement from your super fund for the NOI – and you will need that acknowledgement document when you lodge your tax return.
* Note that if you change super funds (called a ‘rollover’) before receiving the NOI acknowledgement, you miss out on the tax deduction, and it remains a non-concessional contribution.
Salary sacrifice can help in that you save on tax immediately, whereas, with personal contributions, you have to wait until your tax return (but you may be able to submit a PAYG withholding variation to get it sooner).
However, salary sacrifice can have issues because you may not accurately calculate your cap because before the end of the financial year, you could get a pay raise, lose your job, get a bonus, and, most importantly, your employer may not get their last super payment in by the end of the financial year (your employer only has to send super payments quarterly and those quarters don’t align with the tax year, so they could pay your last payment later which counts towards your next financial year’s contribution limit).
Typically, I’d go with personal contribution to have more control.
Benefits of voluntary super contributions
Voluntary super contributions are extra payments you make beyond your employer’s compulsory contribution. They can be concessional or non-concessional, and they’re a great way to build your retirement savings because voluntary contributions can also reduce the amount of tax you pay, resulting in supercharging your retirement funding.
There are three tax advantages of voluntary super contributions, which result in a bigger nest egg.
1. Tax deductions on the contribution
This is only available for concessional contributions, as explained above. On a marginal tax rate (MTR) of 30%, you get a risk-free return of 25%. That rises to 39.34% and 60.38% for those on the 37% and 45% MTR respectively.
2. Lower tax on investment earnings every year
In addition to the above, you also get a low ongoing tax rate on earnings within super.
Super accumulation accounts are taxed at 15% on income, 15% on short-term capital gains, and 10% on long-term capital gains.
You get this low tax rate for earnings on both concessional and non-concessional contributions, and while this is not as lucrative as the tax deductions on concessional contributions, it provides a significant benefit over decades of accumulating retirement assets.
3. zero tax after converting to an account-based pension
When you meet a condition of release to convert to an account-based pension after age 60, all future earnings and withdrawals are 100% tax-free for decades until you take it out to use.
Yes, you read that right.
By the time you convert to an account-based pension, you will likely have the most amount of super that you will ever have, so the amount of tax you save each year is substantial, often many thousands per year. Multiply that by decades of retirement and you start to realise the enormity of this advantage.
When you combine these three tax advantages, it’s easy to see that by not using super for the portion of retirement savings you will use after you can access your super is saying no to free money and will require working many more years to acquire the same retirement nest egg.
Downsides of voluntary super contributions
Any money you put in super is inaccessible until preservation age, which is now effectively 60 for everyone.
Some reasons to keep some of your savings outside super include:
- Paying down non-deductible debt, in particular, your home loan.
- Short-term wants and needs such as a house upgrade, renovation, car, boat, or for further study.
- Having money available to retire or semi-retire early.
In short, the question of how much to invest in super or outside super is tax savings vs flexibility.
Low income earners
Since concessional contributions are taxed 15% by your super fund, if your marginal tax rate is 0% (i.e., your total taxable income is below $22,575), then making a concessional contribution will mean paying more tax, so don’t do that. Don’t worry about your employer’s compulsory super guarantee — you get a tax offset for this (and it is automatic, so there is nothing for you to do).
You could instead make a non-concessional contribution to avoid that, but you are giving up flexibility by locking your money up now when you could retain access to it and contribute it as a concessional or non-concessional contribution later when you are more sure you don’t need it before you can access your super.
Even those on the 18% marginal tax rate (including the 2% Medicare levy), which is a taxable income up to $45,000, only get a small benefit of concessional contributions with only a 3% tax savings for locking up the money until retirement age, so it is worth considering whether it is better to contribute it later when you are nearer to preservation age, especially since you can use unused concessional contributions for up to the past five years under the carry-forward rule provided your total super balance on June 30 of the previous financial year was below $500,000.
Final thoughts
Hopefully that was a clear explanation of the two superannuation contribution types — Concessional and Non-Concessional, the advantages and disadvantages of each, what are the deciding factors between salary sacrifice and personal contributions, and how to claim a tax deduction to turn a non concessional contribution into a concessional contribution.
In the following article, we will go through the different superannuation account types.
Other articles you may find useful
Superannuation account types
How to invest your super
First Home Super Saver Scheme
Government super co-contribution