Superannuation is taxed in three stages – on entry when you or your employer put the money into your superannuation account, on investment earnings and on exit when you withdraw the benefits.
The first stage of tax you have to pay is the “contributions tax”, collected by your super fund on certain contributions for the Australian Taxation Office (ATO) at the rate of 15% flat.
When the contribution has been received by your super fund, they deduct 15% contributions tax for the ATO and allocate the remaining 85% to your account. The total contributions tax you have to pay in a financial year is reflected in your annual statement for that year.
All contributions are generally classified as either a Concessional contribution or Non-concessional contribution. Note that a rollover from another fund is not a contribution.
The contributions tax is only levied on Concessional contributions. Non-concessional contributions are not subject to tax, unless you claim it as a personal tax deduction.
What is a concessional contribution?
The concessional contribution is a deductible or taxable contribution that a tax deduction has been claimed by someone (e.g. you or your employer). It is also known as a before-tax contribution. For example, employers are allowed to claim a tax deduction on superannuation contributions they make on behalf of their employees. These contributions are subject to the 15% contributions tax.
The following contributions are examples of concessional contributions:
- superannuation guarantee (SG), the 9% compulsory employer contribution;
- salary sacrifice contributions;
- any additional contributions paid by your employer to your super fund on your behalf;
- any personal contributions (non-concessional) paid by you to your super fund that you have claimed as a tax deduction.
What is a non-concessional contribution?
This is a personal contribution made by you from an after tax money from your own pocket. Prior to 2007, the non-concessional contribution was popularly known as an undeducted or member contribution. These contributions are not subject to the contributions tax.
If you make a non-concessional contribution and you claim it as a tax deduction (if eligible), the 15% contributions tax will be deducted from it for the ATO and the contribution will be classified as a concessional contribution.
What is an excess contributions tax?
Both concessional and non-concessional contributions have limits as to how much each person can put into their super fund each financial year. These limits are called contributions cap.
For concessional contributions, the amount up to the cap is taxed as 15% (the normal contributions tax). If you exceed the cap, you will be taxed at an additional 31.5% on the amount in excess of the cap. The total tax you may have to pay is 46.5% which is the highest marginal tax rate.
For non-concessional contributions, the amount up to the cap is not taxed. Any amount above the cap is taxed at 46.5%.
The tax levied on excess contributions (amounts above the caps) is called excess contributions tax.
Unlike the 15% contributions tax which is deducted upfront by your super fund when they receive the contributions, with the excess contributions tax, the ATO will send you the tax bill later.
How this works is that your super fund(s) reports your total contribution to the ATO and when you lodge your tax return, the ATO uses the information from your tax return and from your super fund to determine whether or not you’ve exceeded the contributions caps.
What is a release authority?
If you exceed the contributions cap, you’re required to pay the excess contributions tax; the ATO will issue a notice of assessment to you with details on how you’ve exceeded the cap. The ATO will also issue a release authority which you can use to authorize your super fund to withdraw the money from your super pay this tax.
For a concessional excess contribution, you can pay the excess contributions tax out of your own pocket or withdraw the amount from your super to pay it using the release authority.
For a non-concessional contribution, you must pay the excess contributions tax by withdrawing the money from your super using the release authority from the ATO.
The release authorities are only valid for 90 days from the date of issue. If you give it to your super fund, they have 30 days to process it.
Don’t pay 93% tax
If you’re not careful, you could end up paying up to 93% tax on a contribution. Let me explain how this might be possible.
The concessional contributions are taxed at 15%. Excess concessional contributions are taxed at an additional 31.5%, so potentially you can pay up to 46.5%. Excess concessional contributions are counted towards non-concessional contributions cap.
The non-concessional contributions are not subject to tax but the amount in excess of the cap is taxed at 46.5%. If you exceed both concessional and non-concessional contributions caps, the excess amount is taxed at 46.5% under each cap, giving you a total of 93%.
For example, if you (your employer) make $30,000 concessional contributions in 2012/13 financial year, $25,000 is taxed at 15% and the excess amount of $5,000 at 46.5%. The $5,000 is also counted towards a non-concessional cap. In the same financial year, if you use the bring-forward provision and put in $450,000 non-concessional contribution over a three period ($150,000 each year), you’d exceed the cap by $5,000 as this amount is carried over from your excess concessional contribution to your non-concessional contributions cap. You’d pay 46.5% tax on $5,000 under concessional cap and another 46.5% under non-concessional.
What is a No-TFN tax?
If your super fund does not hold your tax file number (TFN), they cannot accept any non-concessional contributions from you. They will give you the opportunity to provide your TFN before they refund the contribution to you.
Your super fund can accept your concessional contributions even if you don’t provide your TFN. However, you will have to pay the No-TFN tax which is 31.5% on top of the normal 15% contributions tax you’ve already paid. The No-TFN tax is deducted at the end of the financial year. If you provide your TFN within four years of making the contribution, your fund may be able to claim the No-TFN tax back from the ATO but some funds may charge you a fee for this service.
High income earners
The government has proposed to increase contributions tax from 15% to 30% for high income earners. If the law is passed, people earning $300,000 and above will have their concessional contributions taxed at 30% from 1 July 2012.
Low income earners
As a result of the new law recently introduced, if you earn less than $37,000 a year you may not have to any tax on your concessional superannuation contributions at all.
For example, let’s say your annual salary is $35,000pa and your employer is required to pay 9% SG which is $3,150. Your super fund will deduct the normal 15% contributions tax from the amount for the ATO. Once you lodge your tax return and the ATO determines that your annual salary is under $37,000, they will refund the 15% tax to your super fund.
The information contained in this article is broad and of a general nature. We have not taken your circumstances into consideration. For a specific advice applicable to your situation, we recommend that you see a financial planner.
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