The Tax Benefits of Maximising Superannuation Contributions

Superannuation is a very tax-effective investment vehicle in Australia. Fund earnings are taxed at just 15%, which is lower than even the lowest marginal tax rate. Concessional (before-tax) contributions are also taxed at just 15%, while non-concessional (after-tax) contributions aren’t taxed at all.

You can therefore minimise the tax you pay by maximising your super contributions. However, it’s important to understand that unlike other investments, you can’t access your super in Australia until you each your preservation age and you meet a condition of release (such as retiring or turning 65). Your preservation age will be between 55 and 60, depending on your date of birth.

It’s also important to understand that there are limits to how much you can invest in super while still receiving favourable tax treatment.

Concessional contribution caps

You can currently make concessional contributions up to $25,000 per financial year into your super. This limit is known as the concessional contributions cap. Concessional contributions include:

  • compulsory super payments made by your employer on your behalf. Employers are currently legally obliged to pay 9.5% of your ordinary time earnings into your super, provided you’re over the age of 18 and you earn more than $450 per month. This is known as the superannuation guarantee. This contribution percentage will progressively increase to 12% by 1 July 2025.
  • any salary sacrifice arrangements that you may have for your employer to pay an additional part of your pre-tax salary or wages into your super.

If your concessional contributions in any financial year exceed the $25,000 cap, you will pay tax on the excess at your marginal rate (less a 15% rebate for the concessional tax paid on the contribution in your super fund), unless you’re eligible to make use of the concessional contribution catch-up.

This catch-up scheme allows you to carry forward any unused concessional contributions cap space that you may have for up to five years, provided that your total super balance at the end of the previous financial year is less than $500,000. It can be an effective way to both minimise your tax and maximise your super.

Non-concessional contribution caps

You can currently make non-concessional contributions up to $100,000 per financial year into your super. This limit is known as the non-concessional contributions cap. Non-concessional contribution in excess of this cap are taxed at the maximum marginal rate of 45% (plus the 2% Medicare levy) unless you’re able to make use of the bring-forward rule.

This rule allows people under 65 to bring forward the non-concessional contributions cap for the next two years into the current financial year, effectively making their cap $300,000 for the current year and nil for the following two years.

Although non-concessional contributions are not taxed when they enter your super fund at all, any earnings on them are taxed at 15%. However, as mentioned earlier, this rate is lower than even the lowest marginal tax rate. So again, this is a very effective way to minimise your tax and maximise your super.

Tax-deductible super contributions

It’s important to understand that recent changes to Australia’s super legislation now allow most people to make voluntary tax-deductible super contributions. Prior to 1 July 2017, only self-employed people were eligible to claim tax deductions for super contributions. Self-employed people can still do this, however you can now also make tax-deductible personal super contributions if you’re an employee earning a salary or wages, provided you meet the eligibility criteria.

It’s important to understand that any super contributions that you claim as tax deductions will count towards your concessional contributions cap. It’s also important to understand that you can’t claim any of your employer’s compulsory superannuation guarantee payments or any salary sacrifice amounts as tax deductions.

How we can help

At Qi Wealth, our experienced, expert team of financial advisers and superannuation specialists can help you put strategies in place to help you minimise your tax and maximise your super nest egg at the same time. We’ll take the time to understand your individual circumstances so that we can provide you with the best possible advice.  We develop long-term, trusted relationships with our clients.

Contact us today to find out how we can help you!