Year End Superannuation Contributions
Andrew Bonnici • June 19, 2024
Superannuation Contribution Fundamentals.
It’s June again. The end of another financial year. At this time of the year, we get bombarded with all things tax deductible. Buy this, do this, claim this on tax.
You might also hear recommendations to make extra contributions into your superannuation. But what do they actually mean by this? What contributions are they talking about, and how are they beneficial to you?
Let's go back to basics and break down the different types of superannuation contributions and then explore why some might be a beneficial at the end of the financial year.
Types of Super Contributions
There are basically two types of superannuation contributions and the difference between them depends on a three-letter word we all know and love…hate - tax. The difference depends on whether the money going into super is un-taxed or has already been taxed.
The superannuation industry calls them Concessional or Non-Concessional Contributions
Concessional Contributions = Pre-Tax Contributions
- Concessional contributions are payments made into your super account before tax is taken out.
- Because tax hasn’t been taken out, it gets taxed when it goes into super.
- The tax rate going in is 15%, which is lower than marginal tax rates.
Non-Concessional Contributions = After Tax Contributions
- Non-concessional contributions are payments made into your super account from your after-tax income.
- Since you've already paid tax on this money, these contributions aren’t taxed again when they go into your super.
Each type of contribution has a limit on the amount that can be put in each year. But you can play catch up.
Let’s take a look at the different types of Concessional Contributions because this is the area where you can get some last-minute tax deductions.
Concessional Contributions
- Employer Superannuation Guarantee (SG) Contributions:
- These are the regular contributions your employer makes to your super fund on your behalf by law.
- Salary Sacrifice Contributions:
- Salary sacrifice is when you tell your employer to put an extra amount into super for you each month and they do it out of pre-tax dollars. Nice. Instant tax saving.
- Personal Deductible Contributions:
- These are voluntary contributions you make from your after tax income which you then claim as a tax deduction in your annual tax return.
- This effectively makes them pre-tax contributions for tax purposes.
Personal Deductible Contributions are the last-minute contributions you can make that can decrease your taxable income. They are tax effective because the contribution tax you pay when the cash enters super is less than your marginal tax rate.
You might use them in the following instances.
- You’ve built up some savings outside of super. An after-tax contribution is tax deductible to you so you will get a tax refund when you do your tax return. Make sure you notify your super fund if you are going to claim a tax deduction though.
- You are self-employed and haven’t paid tax yet. Instead of paying tax at the company rate, or your marginal tax rate if you are a sole trader, you can make a contribution into super and pay 15% contributions tax instead.
- You have a capital gain that you would like to offset.
Catch-Up Contributions
One of the better rule changes that was introduced several years ago was the catch-up contribution rule. The premise is fairly simple. Each year we have a limit of what we can contribute into super as a Concessional Contribution. If we haven’t used the previous year’s limits – we can make a larger catch-up contribution to use them in the current year (remember that your employer contributions are included in the limit).
Suppose a self-employed consultant named Jane has had an exceptionally profitable year, earning $200,000. Her taxable income would place her in the highest tax bracket. By contributing $25,000 to her super, she can:
- Reduce her taxable income to $175,000. Which means instead of paying $60,667 in tax she pays $49,817.
- Benefit from a lower tax rate on the contributed amount (15% within the super fund versus her marginal tax rate). Her contribution will incur $3,750 in contributions tax.
- Create an overall Tax saving of $7,100.
- Have her $21,250 contribution invested in superannuation where she benefits from compound interest at lower ongoing tax rates.
If you would like to discuss any of the ideas raised within this blog I can be reached at andrew@endgameadvice.com.au
This blog’s aim is to provide general information only. It should not be relied upon as personal financial advice. Endgame Advice strongly recommends investors consult a financial adviser prior to making any investment decision. While all care was taken at the time of writing I make no representations as to the accuracy, completeness, suitability, or validity, of any information contained within.
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