Concessional contribution to super – Super Guarantee
There are number of different contribution types you can make to super and the better the choice you make, the greater your financial benefit will be. So, it only makes sense to understand which type is the best for your situation.
Today we will concentrate on contributions to super that are called concessional. I will briefly explain different types of concessional contributions to superannuation and concessional contribution cap and the changes that have been introduced, legislated and are now in force.
What are Concessional contributions?
Concessional contributions are all contributions for which tax deduction is being claimed either by your employer or you. By receiving tax deduction on those contributions made, someone received a tax concession for the balance contributed, hence the name of those contributions being concessional.
What type of contributions are concessional?
We have 3 main types of concessional contributions:
1. Superannuation Guarantee (SG)
2. Salary Sacrifice
3. Personal Contributions for which you claim tax deduction
As I don’t want to overload you with the amount of information and changes introduced, today we will concentrate on Superannuation Guarantee only and next week I will complete explanation of the remaining concessional contributions.
After that, we will discuss non-concessional contributions and at the end we will compare them to see when to use which one. I think this will be of great assistance to many, as I can see lots of confusion and misunderstanding, which only creates loss of great benefits that are available to every single person working in Australia.
1. Superannuation Guarantee or SG
Who is eligible for SG?
If you need to understand what Superannuation Guarantee is, please see: What is Superannuation Part 1.
Some limits are out of date, but general explanation is very valid and will explain most general information about superannuation as your retirement fund.
Since then, there have been many changes introduced to SG contributions. Until 30 June 2022 the eligibility criteria was: all Australian over age of 18 that were employed with income greater than $450.00 per month were eligible for SG contributions.
From 1st July 2022 the earning limit was removed, therefore now every eligible employee regardless of the amount of the pay will receive their superannuation guarantee contributions. This is a great benefit for part-time, casual and seasonal workers. This change was announced with the May 2021 Federal Budget. See all the changes recommended in the budget that could impact your retirement: Federal Budget 2021-22 for Pre and Post Retirement.
What is the rate of SG in 2022/23 financial year?
Another big change is the Superannuation Guarantee rate increase to 10.5% of your gross income – including bonuses, commissions, and loadings (depending on your agreement) in 2022/23 financial year.
The rate of employer contributions is to continue increasing by 0.5% a year until it reaches 12% in 2025/26 financial year.
If you are below 18, or if you are working privately or as a domestic worker, like a nanny or a cleaner, you are eligible for SG if you work more than 30 hours a week.
Since 2013/14 financial year, people over age of 70 who are still employed, are also eligible for the SG.
If you run your own business via P/L structure (company structure), you are required to pay SG for yourself to your super fund, as legally you are an employee of your own company.
If you are self-employed – your super contributions are entirely voluntary.
Temporary residents working in Australia are also entitled to receive SG payments into their super account.
If you are uncertain whether you are eligible or not for super contributions, there is a special online tool provided by the ATO, where you can check your eligibility: Click here
There is also an additional tool to estimate your superannuation entitlement: Click here
And this is the ATO page where you can report if your employer has not been paying your super guarantee contributions for you: Click here
What is the limit of Superannuation Guarantee?
It may surprise many, but yes, there is a limit as to how much can be contributed to superannuation as the SG contribution, which is called the Maximum Super Contribution Base (MSCB).
For the current financial year 2022-23 it is $60,220 per quarter, which is $240,880 per annum.
What that means is that if your income is greater than the listed quarterly maximum, your employer will only contribute the maximum of $6,323 per quarter, with no further SG liability for a higher income earned.
The MSCB does not apply to an industrial award or enterprise agreement though.
This is a question that I get very often:
What happens to my super if I work several jobs?
There is no problem, just provide each of your employers with your choice of the super fund or your employer can easily find it via ATO website.
This is also one of the changes introduced, so people do not end up with several small superannuation accounts, only for your savings to be eaten away in administration fees.
One thing to remember though is that the annual limit for all concessional contributions is $27,500 in 2022/23 financial year. Therefore, if you are a high-income earner, and it is likely that all your employer contributions could take you over that annual limit, or a concessional contribution cap, then you can apply to opt out of receiving some SG contributions from one or more of your employers.
There is a specific form on ATO website called Super Guarantee opt out for high income earners with multiple employers.
Once you submit that form, you will receive a certificate of exemption to be provided to employers who you’ve decided to opt out from.
How are SG contributions taxed?
All SG contributions are taxed at the 15% concessional contribution tax.
They are paid from the before tax money, therefore when comparing to the level of tax that otherwise would have been paid, should you receive that money as your pay, for most workers, there is a great deal of financial benefit to contribute to super.
However, if your income is greater than $250,000 per annum, then you will be charged additional tax of 15% on your concessional contributions above this income level. This is what is called Division 293 for high-income earners.
What is the annual concessional contribution limit?
As I mentioned before, the limit for 2022/23 financial year is $27,500
What is the penalty for exceeding the concessional contribution cap?
It might surprise you, or maybe not, but keeping the concessional contributions within the cap is your responsibility. It is not your employer’s job or the Tax Office job to keep it within limits, but yours.
I actually see it more often that I would have expected people paying more than the contribution cap to their super, which in most cases happens in the salary sacrifice arrangement. If this is your situation, please be very careful not to do so.
Therefore, if you go over the concessional contributions cap for the financial year, the excess amount contributed will be included in your tax return as your assessable income and you will pay tax on it at your marginal tax rate.
When calculating your tax liability, the Tax Office will recognise the 15% contribution tax you have already paid on your excess contributions and will give you the tax offset.
The Tax Office will issue an excess concessional contributions (ECC) determination and will advise you what you need to do to rectify the situation.
If you find it difficult to pay the additional tax, you can decide to withdraw up to 85% of your excess concessional contributions you made, or you can leave the money in your super and pay the additional income tax with your private money.
If you decide to leave the excess contributions in your super account, that money will be counted towards your annual non-concessional contributions cap.
As you can see that is a lot of information to comprehend, just about the basis of Superannuation Guarantee and concessional contributions.
But it is essential for you to understand how those contributions work, as they are the basis of your superannuation balance, as for the majority of people, this is how over the years our superannuation savings are being build up to eventually create our retirement income stream.
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
