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Super fund concessional and non concessional contributions, what are they?

Super Funds have become one of the biggest and fastest growing finance products in Australia and it is no secret why. The Government has provided an excellent platform on which people can build their pension or retirement fund with excellent benefits and incentives to make saving more attractive.

However there are some sections of Super law that limit the amounts you can contribute while still benefiting from the tax breaks and benefits Super funds and contributions afford.

One of the factors that limit the amount contributed is what proportion of your contributions fall under concessional contributions and non-concessional contributions. Understanding what these terms mean and how they affect your super and the tax you pay is well worth spending a few minutes on as they can help you plan your contributions in a more efficient way.

What are concessional contributions?

Put simply concessional contributions are contributions that are still subject to tax. You could compare it to your gross wage, the wage your employer pays from which you have to pay tax, insurance, super, etc…

It is probably easier to understand concessional contributions as before tax contributions. Examples of concessional or before tax contributions are:

1)    Employer contributions. These are the contributions paid by your employer monthly. By law this is a minimum (they can always pay more) of 9% of the employees wage.

2)    Personal contributions paid by the self employed or other eligible super fund members that are used as a tax deduction.

3)    Termination payment in excess of $1 million.

4)    Contributions to a fund where the liability of paying the tax has been transferred to a life insurance company or superannuation trust.

5)    Contributions to a fund that are not assessable due to a fund’s pre 1st of July 1988 funding credits.

It is important to note that even if you split your contributions with your husband or wife, it is the full amount of your contributions that counts toward your concessional contributions cap. As we learned in our last post the concessional contribution cap for anyone under 50 is $50,000 and for member over 50 it is bumped up to $100,000.

It does look like most contributions are considered concessional and therefore taxable and the truth is that most contributions do fall in this category. However that doesn’t mean they all do. Here is a list of contributions that are not considered concessional and therefore the tax of these contributions has either already been paid or are not taxable.

1)    Transfers from a complying fund where the transfer includes untaxed contributions included in the funds assessable income.

2)    Personal contributions that are not claimed as a tax deduction and on which you already have paid tax.

3)    Fund transfers from a foreign fund, again tax has supposedly already been paid on it.

4)    Contributions to constitutionally protected fund.

Example 2 is worth highlighting. This is another Government incentive to encourage personal contributions to our super fund as we will not have to pay tax on any personal contribution we don’t claim tax deduction on. This is good for the government as a $1 in tax paid now is worth many dollars in tax in the future while it still provides us with a tax free investment for our retirement.

Is there a cap on your super contributions

If you have been reading the articles on this blog and other sites on Super Funds you have probably began to realize that it is a sweet deal. You can contribute towards your pension fund, get tax breaks on the money you save for your future, get contributions from your employer and even sacrifice your salary for extra super contributions that benefit both you and your employer. Not only that in many cases the government is willing to match every dollar you contribute towards your super fund.

It doesn’t take a rocket science to realize that the Government is trying its best to make saving for our retirement as attractive as possible. It is no surprise as we see the population of Australia and similar countries aging and people saving less and less. The Government wants you to save and is willing to pay you for the privilege. Pretty nice when someone pays you to do what’s good for you!

This might make you think, mmm, I have some extra cash could I throw it into my super fund and get the great deals the Government is offering. The answer is probably yes, up to a point. The idea is to help people who would otherwise find it very difficult to save and make sure they have enough for when they retire not to provide an easy ride to already wealthy people. Having said that the caps or limits the Government places on super contributions are rather generous and you will probably not have to struggle to keep within the Government cap on super contributions. It is also worth noting that these caps are only on the tax breaks and co-contributions, you can contribute as much as you want, you will just might end up paying more tax than you want to.

So after all that, what is the current concessional contributions cap?
For the 2007/2008 and 2008/2009 financial years the concessional contributions cap (more on what concessional contributions are on our blog) is $50,000 per person. This yearly cap is indexed annually to average weekly (ordinary) time earnings of $5,000.
Anything over this amount will be subject to extra tax.

If you are over 50 the cap increases from $50,000 to $100,000 per year. This allowance is planned to be maintained up to 2012. The logic behind this increase in the contribution cap is that people in their 50’s are probably doing their best to build up their retirement fund as quickly as possible and want their money to be invested as soon as possible.

If for any reason your planned contributions will be over and above your concessional contributions cap you should contact a financial planner that can help you to plan your contributions as tax efficiently as possible.