Concessional Contributions

Understanding Super Concessional Contributions?

Contributions eligible for a tax discount are the hidden heroes of Australia’s retirement system. Every day, we profit from them, yet we rarely stop to consider the great importance that they represent. Despite deep appreciation for concessional contributions, we are always mindful of their underlying drawbacks at all times. Likewise, you should.

Answering the Question, “What Are Concessional Contributions?”

Contributions made to your superannuation account that qualify for a tax credit are known as “concessional contributions.” Your employer or you may make concessionary contributions to your superannuation account. If you know what concessional contributions are and how they function, you may save money on your own personal income tax while saving for retirement in a tax-efficient manner.

Various Concessional Payments

Concessional contributions fall into three basic categories: those made by employers (known as superannuation guarantee or SG payments), those made by employees (known as salary sacrifice or super contributions), and those made by individuals (known as personal concessional contributions).

The SG Contribution to a Superannuation Fund

A superannuation guarantee contribution is a payment made by your employer to your superannuation fund. Your employer’s required contribution is equivalent to 10.5% of your base pay or salary; however, certain workers may get more than this depending on the terms of their employment contract.

If your employer has a shady past, you may want to verify that these SG payments are being deposited. Because your company can write off the SG contribution as a business expenditure, the contributions are categorised as concessional contributions. You may reach out to a superannuation advisor at Omura Wealth Adviser to get a professional recommendation on your specific case.

Benefits of Salary Sacrifice Plans

You can boost your superannuation contributions by the same amount as a percentage of your salary if you and your employer agree to a salary sacrifice plan. This has two benefits: first, it boosts your retirement savings, and second, it decreases the portion of your income subject to taxation at your marginal rate. Contributions made through a salary sacrifice arrangement are known as concessional contributions because your employer may take a tax deduction equivalent to the amount they would pay in compensation for making the contribution.

Concessional Contributions Made by Individuals

A personal concessional contribution is money put into your superannuation fund straight from your checking or savings account. You can deduct contributions to your superannuation fund from your taxable income by first notifying your fund of your intention to do so, and then claiming those contributions on your tax return.

Who Qualifies for Tax Deferred Contributions?

Before reaching age 75, you are eligible to make salary sacrifice and personal concessional payments to your superannuation. To be eligible to make concessional contributions to your superannuation account beyond age 67, you must either meet the employment test or qualify for an exemption. Retirement savings contributions can be made to anybody, regardless of age.

Optimal Levels of Tax-Deductible Contributions

Every individual has a $27,500 annual limit on their concessional contributions. Concessional Contributions of any kind will count towards the limit.

Beginning with the 2019 fiscal year, you have the option of carrying over any unused portion of your super concessional contributions ceiling for a total of five years. However, you can only use the carried-forward amount if your entire superannuation balance on June 30 of the prior financial year was less than $500,000.

If your total concessional contributions in the 2021/22 financial year were $20,000, you may contribute up to $32,500 in the 2022/23 financial year if your super balance was less than $500,000 on 30 June 2022 thanks to the $5,000 you’d be entitled to carry forwards for five years.

The only way to go above the $27,500 annual maximum on concessional contributions is through the carry-forward provision.

The Benefits of Making Concessionary Payments

When you make or are made concessional contributions to your superannuation account, your funds grow in a tax-favored setting. All investment earnings from the Contributions to your super fund are subject to a maximum 15% tax rate. It’s possible that your effective tax rate will be lower than if you had invested the money in your own name.

Furthermore, by decreasing your own taxable income through salary sacrifice or personal concessional payments to super, you might expect to pay less personal income tax.

Problems with Concessional Contributions

Concessional contributions to superannuation have the disadvantage of being unavailable until a release condition is met, such as retirement or turning 65. Salary sacrifice and personal concessional contributions are two ways to boost your retirement savings, but you need to be sure you don’t end up short.

Another factor to think about is that the tax rate on concessional contributions is 15% (or up to 30% for extremely high-income earners) when they are first deposited into your superannuation account.

The money you put into your retirement account is likely to be invested and is thus subject to investment risks such capital fluctuations and market volatility.

Concessional contributions contribute against the taxable portion of your superannuation balance, which is a crucial but sometimes overlooked part of concessional contributions. The taxable portion is subject to taxation as ordinary income if received as pension income before age 60, and it may be subject to taxation as a lump payment before age 60. Furthermore, the taxable component part of a balance given to a non-tax dependant (such as an adult child) is subject to a death benefits tax of 15% (plus Medicare).

Contributions Beyond the Limits of the Concessional Rate

If you make super contributions that bring your taxable income for the year to more than the concessional ceiling, the difference between the two amounts is your assessable income.

You can request a reimbursement of your excess donation amount. The excess contributions will stay in your super account and be applied to your non-concessional contribution ceiling until you request a refund. As a result, you can owe tax on the amount beyond what is allowed for non-deductible Contributions. If you have any clarification regarding this, you should reach out to your superannuation advisor.

Non-Concessional Contributions

What are known as “non-concessional super payments” are those paid to a person’s superannuation account that do not qualify for a tax deduction. Non-concessional contributions are those made to a superannuation fund from a personal bank account after taxes have already been deducted.

How Do Non-Concessional Contributions Differ from Concessional Ones?

Salary sacrifice and personal concessional contributions to superannuation can give immediate and long-term tax savings for those who pay personal income tax at a rate higher than 15%, provided they are not needed for living expenses between now and retirement.

For further details and guidance you should contact a financial advisor or superannuation advisor at Omura Wealth Adviser to get a professional recommendation on your specific case.

More to read: Understanding Super Concessional Contributions?