Australia’s superannuation system is complex. Yet it’s an area that we all need to interact with given the compulsory nature of contributions and the policy end game of having the age pension serve only as a baseline, basic living provision, rather than something that can support the comfortable retirement that we would all hope to enjoy.
In today’s episode I’m going to focus in on the mechanics of superannuation contributions given most of our audience are in the midst of the accumulation phase where contributions are what it’s all about.
I do have to issue a jargon warning with this episode. Regular listeners will know that I do my best to avoid jargon in these podcasts but when it comes to superannuation there are some terms that I just can’t sidestep. I’ll do my best to define them as we go and there will be a written version of this podcast on our blog on the Financial Autonomy website so you can go back and perhaps get your head around it a little bit more that way.
Because we will be focusing entirely on contributions in this episode, I won’t be looking at the retirement phase of superannuation which is clearly an important piece, and indeed the whole reason for contributing into your superannuation account in the first place. We might come back to the retirement phase in a later episode.
Okay so with that preamble out the way let’s jump into this week’s episode, Understanding Superannuation Contributions.
I’m starting with the low hanging fruit here but it’s an obvious place to begin. Who can contribute to superannuation? In recent years eligibility to contribute has been considerably enhanced. Today if you’re an Australian resident under 75 years of age you can contribute to super whether you are in paid employment or not.
There are some special contribution types that we will dig into later, but the two primary contribution types that concern you and I are concessional contributions and non-concessional contributions.
Concessional contributions are those where a tax deduction is claimed. That tax deduction may have been claimed by your employer or it may have been claimed by you. When concessional contributions arrive in your super fund they will be taxed at 15%, with high income earners potentially being levied an additional 15% on top.
Examples of concessional contributions are your standard compulsory employer contributions, salary sacrificed contributions, or contributions you make as a self-employed person where you claim them as a tax deduction.
If concessional contributions are those that have provided a tax deduction, then it’s not a stretch to appreciate that non concessional contributions are those which have not attracted a tax deduction. These then are monies that you have put into super using your after tax savings.
The reason for explaining contribution types is that there are limits as to how much you can contribute into superannuation, known as contribution caps, and these caps are significantly different depending on whether the contribution that you are making is a concessional or non-concessional contribution.
Let’s start with concessional contributions. In the 2022/23 financial year the maximum concessional contribution you can make to your fund without exceeding your contribution cap is $27,500. As mentioned earlier, concessional contributions include your employer contributions, so ensure you factor these in when thinking about any top up contributions you may wish to make.
Should you go over this $27,500 amount the tax office will write to you and give you the option of having this excess paid back out to you with the appropriate tax paid on it. You may also have the option of having those excess contributions treated it as a non concessional contribution, in which case any tax deduction claimed will be unwound.
Where there is no correcting action made, excess contributions will be taxed at the top marginal tax rate, so if you’re already at this rate it may be not a huge issue to have excess contributions, although you have lost access to your money until you are at least 60. Certainly if you are on less than the top marginal tax rate, then exceeding your concessional contribution cap would not be a sensible financial choice.
Concessional contribution caps have changed a lot over the years. Once upon a time it was far easier to make large tax deductible contributions later in life. In this way people would often push hard with their superannuation contributions in the final years of their working life, perhaps contributing $100,000 per year for the final few years of their working life, to really boost their retirement savings and therefore potential retirement income. Today that’s simply not possible, at least if you want a tax deduction in doing it. The $27,500 cap per year means that we must all progressively build our superannuation savings throughout the entirety of our working career, something particularly important to remember for self-employed people who have a tendency to put off making meaningful contributions.
A very helpful recent addition to the superannuation contribution landscape is the ability to now access unused concessional caps from the previous five years, provided your superannuation balance is under $500,000 as at the beginning of the financial year in which you make these catch up contributions. You can see what your unused concessional cap is via your Mygov account.
Contribution caps for non concessional contributions are considerably more generous. Here you can contribute up to $110,000 per year as at the 2022/23 financial year. There is also the provision to do three years worth of non concessional contributions in a single year and then have a zero non concessional cap for the next two years. This is known as the bring forward provision.
Non concessional contributions can be very helpful as a way to boost your super close to retirement. This episode isn’t about retirement income but it’s important to always remember that the primary purpose of accumulating money in superannuation is to provide retirement income, and that is incentivised by all the income and investment earnings of your superannuation when in retirement phase being tax free. So our superannuation system is very very generous in that income drawing phase and therefore getting as much into this environment as possible makes sense for the majority of Australians.
The ability to make these non concessional contributions all the way through until age 75 provides significant financial planning opportunities. Inheritances would normally have occurred by the time you reach this age, and so this type of windfall may be able to be added to your superannuation savings. It may also be that in later life you sell down investments to simplify things and the non-concessional caps, including the bring forward provisions, might enable you to get some of those funds into the superannuation system as well.
Special Purpose Contributions
Concessional and non concessional contributions are far and away the bulk of all superannuation contributions made. There are however a few special purpose contribution types that we use sometimes in client strategies.
The most prominent of these is the downsizer contribution rules. This refers to the scenario where later in life someone sells their large family home and moves into something smaller and better suited to their needs in later life. Downsizing is frequently a piece of the puzzle in retirement planning given the attraction of investing heavily in our primary residence and taking advantage of the capital gains tax free nature of our homes. The downsizer contribution rules mean that you can contribute up to $300,000 into your superannuation fund from the sale proceeds of your home. For a couple that means potentially $600,000 could be added across their two accounts. Significantly, because these are special contribution types they aren’t picked up in the concessional or non-concessional caps.
To be eligible to make a downsizer contribution you must be over 60 years of age at the time of contribution. The contribution amount cannot exceed the sale proceeds received upon the sale of your primary residence, and you must have owned that primary residence for at least 10 years prior to the sale. There are some other important fine print details around downsizer contributions, so if this is something you are intending to take advantage of, ensure you obtain professional advice.
Another type of special purpose contribution are those related to personal injury payouts. These are typically compensation settlements in respect to personal injury. Such payments are able to be contributed into superannuation without coming under any of the normal contribution caps. Once again there’s plenty of fine detail with this one.
And a third type of special contribution are those applicable to small business owners. There has long been a recognition that for many owners of small businesses, the value of their business represents a large portion of their wealth and ultimately is intended to provide for them in retirement. With this in mind there are contribution rules that enable business owners to deposit some or all of the proceeds from the sale of their business into superannuation so that it can then be converted into a retirement income stream. There’s quite a bit of complexity around the rules in this space. If you’re someone who owns a business where you would anticipate it having a saleable value when it’s time for you to exit, ensure you talk to your financial planner about what might be possible here. Your accountant would likely also have familiarity with these rules too.
A strategy that’s getting a bit of airplay just now is what’s known as the re contribution strategy. Once your superannuation becomes an income stream that income is tax free and any earnings on your superannuation savings are also tax free in this phase. However none of us live forever. When we pass away our superannuation will flow to our beneficiaries. Where it goes to our spouse, that’s very simple, there are no tax consequences and it’s largely business as usual. However where our unused superannuation savings pass on to our adult children or other beneficiaries, perhaps nieces or nephews, there is tax payable on the portion of your account that was concessional contributions, and all the earnings over the life of your superannuation savings.
Many people feel somewhat aggrieved by the potential for tax to be deducted from their superannuation accounts upon their death. A re-contribution strategy is a way to reduce this tax impost.
Under a re-contribution strategy, you withdraw a lump sum out of your account and then deposit it back in as a non-concessional contribution. This changes the proportions of taxable and non-taxable amounts within your account and so serves to reduce the amount of tax payable by your beneficiaries. It’s only available to those who have the ability to withdraw from super, so therefore you need to be over 60 years of age and have ceased work at some point.
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