Understanding the difference between concessional and non-concessional contributions is essential for effectively managing your retirement savings. Here’s a simple guide that we have put together to help you grasp these concepts and make informed decisions about your super contributions.
Concessional Contributions ( The Before-Tax Advantage )
Concessional contributions are payments made into your super fund from your pre-tax income. These contributions are taxed at a flat rate of 15% by the super fund, which is often lower than your marginal tax rate. This tax advantage makes concessional contributions a popular way to boost retirement savings while reducing your taxable income.
Types of concessional contributions include:
- Employer contributions, such as the Super Guarantee (SG) and any additional contributions made under a salary sacrifice arrangement.
- Personal contributions for which you claim an income tax deduction (common among self-employed sole traders)
- Certain other amounts, such as notional taxed contributions to defined benefit funds and amounts transferred from foreign super funds under specific conditions.
It’s important to be aware of the concessional contributions cap, which limits the amount you can contribute at the concessional tax rate each financial year. Exceeding this cap can result in additional taxes!! From 1 July, 2024 the concessional contributions caps will be increasing from $27,500 to $30,000.
Non-Concessional Contributions: ( The After-Tax Boost )
Non-concessional contributions are made from your after-tax income. Since you’ve already paid tax on this money, these contributions are not taxed again when entering your super fund. Non-concessional contributions are a way to add to your super from your savings or by transferring personal assets into your super fund.
These contributions include:
- Personal contributions for which you do not claim an income tax deduction.
- Contributions made by your spouse to your super fund (under certain conditions).
- Contributions exceeding the lifetime capital gains tax (CGT) cap under small business exemptions.
Like concessional contributions, there is a cap on non-concessional contributions to prevent excessive amounts from being added to super funds without tax consequences. Contributions beyond this cap may attract additional taxes. From 1 July 2024, the concessional cap will increase from $110k to $120k.
Exclusions and Special Circumstances
Certain contributions are excluded from non-concessional caps, such as personal injury payments, downsizer contributions from selling your home, and specific small business CGT exemption contributions. It’s important to inform your super fund if you wish to have these contributions excluded by providing the necessary forms and meeting all conditions.
Government Co-Contributions and Tax Offsets
To encourage Australians to save for retirement, the government offers co-contributions for eligible low or middle-income earners who make personal non-concessional contributions. Additionally, the low income super tax offset (LISTO) provides up to $500 to low-income earners’ super funds to offset the tax paid on concessional contributions.
Final Thoughts
Understanding the difference between concessional and non-concessional contributions is key to maximising your superannuation benefits. By making informed decisions about your super contributions, you can take advantage of tax benefits and government incentives to grow your retirement nest egg.
Remember to keep an eye on contribution caps and stay updated with the latest superannuation rules to ensure you’re making the most of your super. For more information, don’t hesitate to get in touch with our team.
