The Basics of Concessional and Non-Concessional Contributions
Often, we are asked why would we make concessional or non-concessional contributions. Super rules are constantly changing and we could use that money to buy an investment property or even spend it.
First of all, lets define the main types of contributions:
Concessional contributions (CC) are the contributions going into super that you get a tax concession on. Basically, the money going in is paid from pre-taxed income and the earnings are only taxed inside the Superfund at a maximum rate of 15%. The maximum amount that can be contributed into super in a financial year is $25,000 for all ages.
Concessional contributions include:
- 5% employer Super Guarantee Contributions (SGC)
- Employer excess voluntary contributions*
- Salary sacrifice contributions
- Personal deductible contributions.
* In some instances, employers will pay insurance premiums inside super or even pay the administration fees on behalf of the employee. These fees can count towards the concessional cap so be careful. It’s always worth calling your super fund and asking whether the current FY concessional contributions balance is running out. Also, be aware that you may have several superfunds and the limit of $25,000 is across all superfunds.
Non-Concessional Contributions (NCC) are those made into super from after tax income. You don’t get a tax concession with the money going into the fund but will get tax benefits on the earnings inside the Superfund. Non-Concessional Contributions are available to everyone except those between 65 and 74 (in which case you must meet the “Work Test”).
Non-Concessional Contributions include:
- Money contributed into super from money saved from income that you have already paid tax on
- Proceeds from the sale of an asset, shares or investment property that you have already paid tax on
- Inheritance or gifted money
Truth of the matter is that investing into super is not an instant gratification exercise and the benefits will only be seen over the long term, especially if you are young. We can only tell you the importance of putting money into super and the bottom line is that the tax benefits are hard to beat as long as you can get your head around how it works.
- If you have the cash flow and a good budget in place you will not regret starting to make CCs. The sooner you can start and the younger you are, the better and more you will benefit from the compounding effect.
- If you have not been able to put money into super due to life’s circumstances – don’t worry. You can still look at getting money into super, except you might just need to do a bit more homework but the benefits can still be considerable.
- It’s forced savings. If you had access to the money, you would most likely access it at some point – you are only human.
- Depending on your level of income, it may not be worth making CCs in the short term. Still consider the long-term effects of building wealth, however, it might also be worth just considering NCCs.
- If you go over the CC or NCC cap, you will have to pay your marginal tax rate on the excess contribution. You may be given the option to withdraw the excess or keep it in. You will have to pay a notional interest penalty interest so be aware.