What Is the Contributions Tax on Superannuation?

Superannuation is Australia’s compulsory retirement savings system, designed to provide individuals with an income in retirement. Contributions to a superannuation fund are subject to specific tax rules. The tax treatment of contributions can vary significantly based on their type and the amount contributed.

Understanding Superannuation Contribution Types

Superannuation contributions are broadly categorized into two main types: concessional and non-concessional contributions. Each type has distinct tax implications and rules governing their application.

Concessional contributions are considered “before-tax” contributions, meaning they are typically made from pre-tax income. Examples include mandatory employer Superannuation Guarantee (SG) contributions, which are currently 11.5% of an employee’s salary as of July 1, 2024, rising to 12% from July 1, 2025. Salary sacrifice contributions, where an employee elects to forgo a portion of their pre-tax salary in favor of a super contribution, also fall into this category. Additionally, personal contributions for which an individual claims a tax deduction are treated as concessional. These contributions are taxed within the super fund itself.

Non-concessional contributions, conversely, are “after-tax” contributions, made from income that has already been taxed in the individual’s hands. This category includes personal contributions for which no tax deduction is claimed, as well as spouse contributions. These contributions are subject to different limits and rules compared to their concessional counterparts.

Taxation of Concessional Contributions

Concessional contributions generally face a tax of 15% once they are received by the super fund. This tax is deducted directly by the super fund before the contribution is allocated to the member’s account.

An additional tax, known as Division 293 tax, applies to concessional contributions for high-income earners. This tax aims to reduce the tax concession received by individuals whose income and concessional contributions exceed a specified threshold. The Division 293 tax threshold is currently $250,000.

If an individual’s combined income and concessional contributions surpass this $250,000 threshold, an additional 15% tax is levied on their concessional contributions, or the amount above the threshold, whichever is less. This effectively raises the tax rate on these contributions for affected individuals to 30%. The Australian Taxation Office (ATO) assesses eligibility for Division 293 tax based on information from income tax returns and super fund reports. The ATO then issues a notice of assessment to individuals liable for this tax. Payment options for Division 293 tax include paying from personal funds or electing to release money from the super fund.

Superannuation Contribution Caps

The Australian tax system sets annual limits, known as contribution caps, on the amount of superannuation contributions that can be made without incurring additional tax. These caps apply to both concessional and non-concessional contributions. Exceeding these limits can lead to additional tax liabilities.

For concessional contributions, the annual cap is $30,000 starting from July 1, 2024. Individuals may be able to contribute more than the general cap by utilizing the “carry-forward” rule for unused concessional contributions. This rule allows unused cap amounts from up to five previous financial years, starting from 2018-19, to be carried forward. Eligibility for this rule requires a total super balance of less than $500,000 on June 30 of the previous financial year.

Regarding non-concessional contributions, the annual cap is $120,000 from July 1, 2024. Individuals under 75 years of age may be eligible for the “bring-forward” rule, which allows them to make up to three years’ worth of non-concessional contributions in a single year. The amount that can be brought forward depends on the individual’s total super balance at June 30 of the previous financial year. However, no non-concessional contributions can be made if the total super balance is equal to or more than the general transfer balance cap (e.g., $1.9 million from 2023-24) at the end of the previous financial year.

Tax Implications of Exceeding Contribution Caps

Exceeding the superannuation contribution caps results in specific tax consequences designed to discourage excessive contributions. The tax treatment differs depending on whether concessional or non-concessional caps are breached. The Australian Taxation Office (ATO) plays a central role in identifying and notifying individuals of these excesses.

If an individual exceeds their concessional contribution cap, the excess amount is included in their assessable income for the financial year. This excess is then taxed at the individual’s marginal income tax rate. To account for the 15% tax already paid by the super fund on the concessional contribution, a 15% tax offset is applied. The ATO identifies these excess contributions and issues a determination notice. Individuals have options, including releasing up to 85% of the excess from their super fund to cover the additional tax liability, or leaving the excess in super, in which case it counts towards their non-concessional cap.

When non-concessional contribution caps are exceeded, the tax implications are also significant. The excess non-concessional contributions, along with 85% of their associated earnings, are taxed at the individual’s marginal tax rate. The ATO notifies individuals of excess non-concessional contributions. Individuals are typically required to release these excess amounts and their associated earnings from their super fund. Failure to release these excess amounts can result in a substantially higher effective tax rate, potentially up to 94% on the excess.