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.