Understanding Superannuation

Superannuation is an investment vehicle designed to assist Australians to save for retirement. The federal government encourages saving through superannuation by providing generous tax incentives for contributions, during investment, and in retirement.

Contributing to superannuation 

  • You can contribute to superannuation in the following circumstances:
  • If you are under age 65 you may contribute to superannuation on your own behalf.
  • If your spouse is under age 65 you may contribute to superannuation on behalf of your spouse.
  • If you are 65 years of age or over but under 75 years of age you may contribute to superannuation if you meet the work test. To meet the work test you must have worked at least 40 hours within 30 consecutive days in the current financial year.
  • If you are 65 years of over but under 70 years of age and meet the work test, your spouse may contribute on your behalf. Your spouse cannot contribute on your behalf if you meet the work test but are over age 70.
  • If you are under 75 and employed your employer may also be required to, or may choose to, contribute to superannuation on your behalf.
  • If you are over 75 years of age you are generally no longer eligible to contribute to superannuation, regardless of your working status. You may be able to contribute only by the cut off date which is the 28th day of the month following the month you turn 75 if you meet the criteria. You may also contribute by making a downsizer contribution, if eligible.
  • If you are over age 65 you may be eligible to make a ‘downsizer contribution’, if eligible.

Employer super contributions

Superannuation guarantee (SG)
The SG system was introduced during the early 1990s. If you are eligible for super guarantee (SG) contributions, your employer must pay a minimum of 9.5% of you ordinary time earnings (OTE) up to the ‘maximum contribution base’ (see table) into your superannuation account at least every quarter. An employer is required to make superannuation contributions for employees who are both over 18 years of age and earning over $450 per month. If an employee is under 18 years of age, they must meet certain conditions and work more than 30 hours per week to be entitled to superannuation contributions from their employer. It is important to note that employer SG contributions count towards the concessional contribution limit.

Maximum super contributions base
Financial Year Income per quarter Maximum amount of SG employer required to contribute per quarter
2020-2021 $57,090 $5,423.55
2019-2020 $55,270 $5,250.65
2018-2019 $54,030 $5,132.85
2017-2018 $52,760 $5,012.20

Salary Sacrifice

Salary sacrifice is the portion of pre-tax salary that an employee gives up in exchange for additional contributions being made to superannuation by the employer. Salary sacrifice amounts are paid from your pre-tax salary or wages and are taxed in the super fund at a rate of 15%. Generally, this tax rate is less than your marginal tax rate, therefore through salary sacrifice you can reduce your tax liability while building wealth for your retirement. Salary sacrificed amounts are not counted as assessable income for tax purposes. Salary sacrificed super contributions are classified as employer contributions, not personal contributions although they are paid from your earnings, rather than in addition to as is the case with SG contributions. It is important to note that salary sacrifice contributions count towards the concessional contribution limit.

Superannuation contributions when self-employed
If you are self-employed you are not required to make contributions for yourself. You can however, choose to contribute to super for yourself as personal contributions, and you may be able to claim a tax deduction for your super contributions. Your fund is only able to accept personal contributions from you if it has your tax file number. Make sure your fund has your tax file number or your contributions will be taxed at an additional 34%.

Tax on contributions

Tax on concessional (before tax) contributions – these contributions are taxed at 15%*
Tax on non-concessional (after tax) contributions – these contributions are not subject to tax*
* There are cap limits on the amount of contributions you can make per year and these may vary depending on the financial year and your age or circumstances. If you exceed the cap limits you may have to pay extra tax, known as an excess contributions tax.

If you exceed the before-tax (concessional) super contributions cap, the excess is included in your income tax return and taxed at your marginal tax rate. You can choose to withdraw some of the excess contributions to pay the additional tax.

If you exceed the after-tax (non-concessional) super contributions cap, you can choose to withdraw the excess contributions and any earnings. The earnings are then included in your income tax assessment and taxed at your marginal rate. If you don’t withdraw the earnings, the excess is taxed at 47%.

Division 293 tax – this is an additional tax for high income earners. If your combined income and super contributions are more than the $250,000 threshold, Division 293 tax is 15% of your taxable concessional contributions above the threshold.

Why are there limits on how much I can contribute to superannuation?
Regular contributions enable you to grow your superannuation faster by way of compounding your investment returns. While the government wants to encourage people to save for retirement, it doesn’t want us treating superannuation as a tax haven. For this reason, limits have been placed on both concessional and non-concessional contributions.

Types of contributions and their cap limits
Concessional contributions are before-tax contributions including:

  • Superannuation Guarantee (SG) employer contributions
  • Salary sacrificed employer contributions
  • Personal contributions claimed as a tax deduction

The cap limit for concessional contributions each financial year is currently $25,000 per individual. Prior to the 1st of July 2017 the limit varied depending on your age.

Non-concessional contributions are after tax contributions including:

  • Contributions made by you, or by your employer on your behalf, from your after-tax income
  • Personal contributions not claimed as a tax deduction
  • Contributions your spouse has made on your behalf
  • Government co-contribution, if eligible

The cap limit for non-concessional contributions each financial year is currently $100,000 per individual. This amount was previously $180,000 but was reduced as of 1st of July 2017.

Downsizer contributions

If you are 65 years of age or older (no maximum age limit) you may be eligible to make a downsizer contribution of up to $300,000 from the proceeds of the sale of your home. A downsizer contribution is not a non-concessional contribution and does not count towards contribution caps.

  • A couple is able to contribute up to $600,000 ($300,000 per individual).
  • Your home must have been owned by yourself or your spouse for 10 years or more at the time of the sale.
  • The contribution must be made into your superannuation account within 90 days of the sale, generally settlement date.
  • You must not have previously made a downsizer contribution from the sale of any other home, you may only make downsizing contributions for the sale of one home.
  • The contribution amount must not exceed the total proceeds of the sale of the home.
  • The proceeds from the sale of the home must be either exempt or partially exempt from capital gains tax under the main residence exemption.

Government super co-contributions

The government super co-contribution is automatically calculated and paid to your fund when you lodge a tax return, if it is determined that you are eligible. The amount you are entitled to depends on your income and how much you contribute. If you are a low to middle income earner and make personal non-concessional contributions of $1,000 the government may also make a contribution up to a maximum of $500.

If you earn $38,564 or less (2019-2020 financial year) and contribute $1,000 you will receive the maximum $500 co-contribution. If you earn between $38,565 and $53,564 (2019-2020 financial year) your maximum entitlement will reduce progressively as your income rises. If you earn $53,564 or more you will not receive any co-contribution.

You are not entitled to the co-contribution for any contributions you have claimed a tax deduction for.

Q and A

What happens if I exceed these limits, and what do I do if I am unsure of my contribution amounts?

Excess contributions are taxed at 32% (in addition to ordinary 15% contributions tax) with the amount of your excess contributions also counting towards the non-concessional limit. Excess non-concessional contributions are taxed at 47%.
Exceeding the contribution limits is not uncommon, particularly as many people don’t realise that their employer SG contributions count towards concessional contributions limits. Given the potential consequences of breaching the contribution limits, it is important to speak to your financial adviser if you are unsure about your contribution amounts.
It is also important to be aware that contributions are counted in the financial year that they are received by your fund, not in the year that they are paid by you. This is particularly important to be aware of for those trying to rush to get contributions in by June 30.

For more information regarding Superannuation, please click here