Understanding financial advice
Financial life goals
Tools and resources
Products and services
Investing with IOOF
Your retirement goals
Understanding super & money
On 1 July 2021, both the concessional and non-concessional superannuation contribution limits, also known as ‘super contribution caps’, will rise. This is good news because this is the first time these limits have changed since 1 July 2017, when the concessional contributions cap was reduced to $25,000 pa for the 2017/2018 financial year and onwards. Since that time, the non-concessional contribution cap hasn’t changed either, currently $100,000 pa.
What are Concessional contributions?
These are super contributions made by your employer, from your pre-tax income (salary sacrifice contribution) or contributions for which you claim a tax deduction. They are generally taxed at only 15 per cent instead of your marginal tax rate.
What are Non-concessional contributions?
These are super contributions made from your after-tax income. Since you’ve already paid income tax on these contributions, they are tax-free going into your super.
Due to indexation of Australians’ average weekly ordinary time earnings (AWOTE), the concessional cap will increase to $27,500 from 1 July 2021.
What are the current and new contribution caps?
What does this increase mean for you?
Any increase in the super contribution caps means you may increase how much you can contribute to super. The tax benefits plus the compounding of returns can make a substantial difference to your final super benefit.
Additional concessional contributions to super can be made by ‘salary sacrificing’ through your employer or via ‘personal deductible contributions’.
You should consider whether to make non-concessional contributions or maximise your concessional contributions.
Additional concessional contributions can reduce your taxable income and your end-of-year tax liability. Concessional contributions are subject to just 15% tax on entry to your super fund compared to your upper marginal tax rate which could be as high as 37% or 45% (plus 2% Medicare levy) if you’re in one of the highest tax brackets.
Note: an additional 15% tax may apply to concessional contributions if your income is over $250,000.
How to make concessional contributions
Additional concessional contributions to super can be made by ‘salary sacrificing’ through your employer or via ‘personal deductible contributions’. Both methods have the same tax benefit so the method you choose comes down to what suits you:
Salary sacrificing comes out of your pre-tax salary and reduces your net taxable income meaning you may pay less tax on your personal income.
Personal deductible contributions are paid by you, and you can then claim a tax deduction when completing your tax return. If you choose this method, you need to submit a form to your super fund by a certain time advising your ‘intent to claim a deduction’ on your super contribution.
Making the most of ‘catch up’ contributions
‘Catch up’ contributions may allow you to use up to five previous financial years’ unused contribution caps in the current financial year if you meet certain requirements. The 2018/19 financial year was the first financial year you could accumulate unused concessional contributions. Unused carried forward concessional cap amounts expire after five years.
Non-concessional contributions do not entitle you to a tax deduction but you won’t pay any additional tax as you’ve already paid tax via your personal income tax liability. Earnings on the contributions are taxed at only 15% and are tax-free once you access them as either a lump sum or a pension after age 60, when you satisfy a condition of release such as retirement.Making non-concessional contributions to super might benefit you if you are seeking to contribute larger lump sum contributions.
Making the most of the ‘bring forward rule’
If you were age 64 or less at 1 July 2020 you may be eligible to use the ‘bring forward rule’, ie bring forward and use up to two future years’ worth of your non-concessional contribution caps. Depending on your total superannuation balance this may allow you to contribute up to $300,000 (3 x $100,000) into super this financial year. However, if you wait and the cap increases from $100,000 to $110,000, the bring forward amount will increase to $330,000 next financial year. You generally need to meet a 'work test' if you are 67 to 74 years old at the time of contribution.
With increases in the contributions caps on the horizon, 2021 may be a good year to revisit how much you are contributing to super and make a super plan for the future. Please contact us and we can help.