Superannuation is more than just saving for the future.
When we talk about contributing to it, there are a few strategies that not only minimize the tax you pay but also score some free money from the government, all while growing your account balance.
I want to help you understand the different types of contributions and the incentives available so you can grow that larger retirement fund much sooner.
Understanding Super Contributions
When we contribute to super, we're putting money into our superannuation accounts. We do this through three main ways:
- Concessional Contributions
- Non-Concessional Contributions
- Government Contributions
Concessional Contributions
Concessional contributions are pre-tax contributions, meaning the money is added to your super before income tax is deducted. The main perk here is tax savings. These contributions are taxed at a flat rate of 15% when they enter your super fund, which is likely lower than your marginal tax rate.
Concessional Contributions Cap
There is an annual limit to the amount of concessional contributions that can be made into your super. If you exceed this cap over the course of a financial year, the excess contributions are taxed at your marginal tax rate and counted as a non-concessional contribution.
Examples of Concessional Contributions:
- Super Guarantee: This is the payment your employer makes, which is a percentage of your income contributed to your super account. By mid-2025, this will be 12% of your income.
- Salary Sacrifice: This is a voluntary option where you can reduce the tax you pay by contributing more money into your super account through pre-tax concessional contributions.
Salary Sacrifice Example
Let's look at Alex, who earns $80,000 a year. With a 12% super guarantee, he gets $9,600 a year towards his super. Alex decides to salary sacrifice an additional 5%, making his total contribution 17% of his income per year. This reduces his taxable income from $80,000 to $76,000, saving him $1,280 in tax over the year. While Alex sees a reduction in his take-home pay by just over $2,700, he ends up with $4,000 more in his super account by the end of the financial year.
Non-Concessional Contributions
Non-concessional contributions are made from money that has already been taxed, such as your take-home pay or personal savings. While these don't provide an immediate tax benefit, they grow tax-free within your super fund. You can contribute up to $120,000 per year.
Examples of Non-Concessional Contributions:
- Personal transfers into your super account from your savings or any other post-tax money.
- Contributions exceeding the concessional cap.
Carry Forward Rules
If you don't use all of your cap in a financial year and your total balance is less than $500,000 at the end of the previous financial year, you can carry forward unused amounts for up to five years for concessional contributions, and up to three years for non-concessional contributions.
Government Contributions
The government offers several incentives to encourage us to save more for retirement. Let's explore these options:
Co-Contributions
For low to middle-income earners, the government matches post-tax contributions at 50% up to a maximum of $500. If your total income is less than $60,000, you may be eligible.
Low-Income Super Tax Offset
If you have an adjusted taxable income of up to $37,000, you might be eligible to receive a refund of the tax paid on your concessional contributions, up to $500.
Spouse Tax Offset
If your spouse earns under $40,000 a year, you can claim a tax offset of up to 18% on the contributions you make to their super account, with a maximum offset of $540.
Downsizer Contributions
If you are 55 or older and have owned your home for more than 10 years, you may contribute up to $300,000 per person (or $600,000 per couple) from the sale of your home into your super fund. This doesn't count towards your contribution cap but is considered in your transfer balance cap.
In Summary
Maximizing your super contributions not only boosts your retirement savings but also provides significant tax advantages and government incentives.
Whether through concessional contributions, non-concessional contributions, or taking advantage of government incentives, there are many ways to grow your super balance effectively.
For more detailed information, visit the ATO website or talk to your super fund.
Let me know what contribution type you love taking advantage of the most.
