In order to encourage people to save money for retirement, the Federal Government under Paul Keating in 1992 introduced Employer Guaranteed Superannuation Contributions. While you can make additional payments on top of these contributions, what is the incentive for people to put money aside with very restricted access conditions prior to retirement? The answer is substantial tax concessions.
Depending on how much income you earn, you could be paying a marginal tax rate of anywhere from zero to forty nine percent (including the Medicare Levy of 2% and the Temporary Budget Repair Levy of 2%) on your income outside of your super.
How much tax do you pay on money that goes into your super fund?
If you earn under $300,000 a year, the answer is fifteen percent on pre-tax contributions, which includes your employer’s contributions as well as any salary sacrifice contributions you choose to make (30% for those earning over $300,000). The maximum amount of these pre-tax (concessional) contributions you can make in a financial year depends on your age. If you are forty-nine or younger, you can contribute up to $30,000. If you are fifty or older, you can contribute a maximum of $35,000.
You can also make after-tax (non-concessional) contributions, which aren’t taxed at all in your super fund, as they have already been taxed as income. Because the superannuation tax rate doesn’t apply, the cap on these contributions is considerably higher, at $180,000 per financial year. You can also choose to make three year’s worth of contributions in one lump sum payment up to $540,000, but you then can’t make further non-concessional contributions in the following two years.
What happens if you exceed these limits?
Depending on whether you exceed the concessional or non-concessional cap, the penalty varies. If you exceed the concessional cap, you pay tax at your marginal tax rate on the excess. In this situation you have the option of using some of the excess to pay the additional tax that you have incurred.
If you exceed the non-concessional cap, you have two options. You can either withdraw the excess amount plus its earnings (because you’ve already paid tax on this money you won’t have to pay tax on the contribution, but you will pay tax on any earnings the money generated while in your account), or you can leave the money in your super account. In this case you would pay tax at a rate of 47%. Keep in mind that you have already paid tax on this money, so you could be losing more than seventy cents on the dollar if you choose this option!
By Jennifer Lowe