What Type Of Super Contribution Is Being Made?
The first step is to determine the type of superannuation contribution that is being made.
There are two broad types of contributions – those made from pre-tax money and those from after-tax money.
Generally, contributions made by an employer are made from pre-tax money. The employer is usually able to claim a tax deduction on the contribution being made. Because the contribution comes from pre-tax money (i.e. it’s an expense to the employer), it will be subject to a 15% contributions tax when it’s contributed to the super fund.
You may choose to make salary sacrifice contributions to your superannuation fund. This is where you contribute money from your pre-tax salary to super.
At the fund level, it’s seen as a contribution via pre-tax money, therefore the 15% contributions tax will apply to it.
Many people choose to salary sacrifice because the 15% contributions tax is less than their marginal rate of tax would would otherwise apply to that money.
You may choose to make a personal contribution to super. This can be from after-tax money from your fortnightly salary. You could also contribute a lump sum – a term deposit may fall due or you may sell another investment and have a lump sum to invest into super.
Usually, because these contributions are made from money that you’ve already paid tax on, they’re seen as personal, after-tax contributions by the fund and no tax is applicable.
What Is Contributions Tax?
We’ve mentioned the 15% contribution tax in the above examples. It’s important to provide a little more information on this tax.
Strictly speaking, contributions into the fund are seen as income to the fund. At a simplistic level, if there were no expenses to be offset against the income, then the full 15% rate of tax would be payable.
In many funds, there are some items that can be offset against the income.
You may have deductions from the fund to cover your insurance premiums. These are a deductible expense to the fund. In this case they would reduce the level of net income the fund receives (total income less expenses) and tax would only be payable on the net amount.
So if you contributed $10,000 into your fund via pre-tax dollars, and the fund paid for insurance premiums of $5,000 you’d only pay the 15% tax on the remaining $5,000. So a $1,500 tax (15% of $10,000) would be reduced to $750.
In practice, it doesn’t always work like this.
Most retail super funds deduct the 15% tax from the contributions as they arrive at the fund. They may not have to remit that money to the Australia Taxation Office until months later, but they’ll deduct the tax upfront. This way the balance you see is always the net amount.
Some superannuation mastertrusts do it differently, and show the tax initially as a provision in the fund, but don’t actually deduct it until required by the ATO. The advantage of this is that you have all your money in the fund earning a return until the tax is required to be deducted. The disadvantage is that you may think you have more in your account than you actually do!
If you have a self managed super fund (SMSF) then usually you only need to pay tax once a year. So you may receive a contribution in July of one year, but tax wouldn’t need to be paid until the next financial year, and even then you may have six months to pay it. So you could have the benefit of the total amount of money growing in your account (or declining if markets were bad) for a long period of time until it’s needed to be taxed.
Now, working out the tax on superannuation contributions is not always so simple. There are limits to how much you can contribute to super and if you exceed those limits, then you may end up paying more contributions tax.
For the 2014/15 financial year, the maximum cap for Concessional contributions is $30,000 per financial year. If you’re aged 49 or over at June 30, 2014, then your contribution cap increases to $35,000 for the financial year.
Concessional contributions are those contributions made from pre-tax income. Most commonly they are your employer contributions and any salary sacrifice contributions that you make. If you’re self employed and make contributions to super that you then claim a tax deduction on, then those contributions are also classed as Concessional contributions.
If you exceed the cap in a financial year, then penalties can apply. What happens is that any excess contributions (i.e. exceeding the relevant contribution cap) will be taxed at your marginal rate of tax.
A common mistake is to not allow for any employer contributions that are received.
As an example, let’s say the Peter contributes $40,000 to his super fund as a concessional contribution during a financial year. His employer also contributes $10,000 as the compulsory Superannuation Guarantee payment.
If his contribution cap was $30,000, then the total payments of $50,000 push him over the limit by $20,000.
When he submits his income tax return, the extra $20,000 will be added to his taxable income and he’ll have to pay tax on the difference between the 15% that’s already been paid (contribution tax paid by the super fund) and his marginal rate of tax.
This effectively negates any tax benefits of salary sacrificing the extra money to super, as the portion over the limit is still taxed at his marginal rate of tax.
Summary – Tax On Super Contributions
Once you know the type of contribution that is being made to super, it’s usually simple to determine whether the 15% contribution tax does or doesn’t apply. Things get a little more tricky if you exceed the contributions cap, but most people are aware of the limits and make sure they stay below.
Remember, if you need help with superannuation contributions or other financial matters, seek advice from a financial planning professional.