A listener recently sent us some questions wanting to know how claiming a tax deduction on a personal contribution to superannuation is relevant to the concessional contribution cap. They were also seeking more information regarding concessional and non-concessional contributions.
Most people think making concessional contributions is the same as salary sacrificing. In the past, for wage and salary earners, it was certainly the only way they could contribute to their super. Furthermore, people have conditioned themselves to think of salary sacrificing and employer contributions as concessional contributions, and lump sum contributions as non-concessional contributions. In a way, they are correct to start with. Let us explain....
When you make personal contributions to your super using after-tax money, they are considered non-concessional. If, however, you fill out what’s called a ‘Notice of intent to claim a tax deduction’ ('NOIT') form, then this changes the contribution to concessional. You can claim the full amount, or a portion of it.
For example, you contribute $50,000 of after-tax money to your super fund (using, for example, BPAY) as a personal contribution. This $50,000 will be considered a non-concessional contribution, so no super contributions tax is deducted on that amount. To claim a tax-deduction on the full $50,000, or a portion of it, you then need to lodge a NOIT form (as mentioned above).
When you salary sacrifice, you're paying with before-tax money, so you receive that tax saving as you get paid. But, if you change your non-concessional contribution to concessional (via a NOIT) , when it comes to tax return time, it will reduce your taxable income by the amount on which you claimed the deduction.
For example, let's say you made a $50,000 after-tax personal (non-concessional) contribution and decide to claim the full amount as a tax deduction. If your taxable income was $100,000 for the year, your new taxable income would drop to $50,000.
Let’s go back to the example of the person with a $100,000 taxable income who has contributed $50,000 to their super as a non-concessional contribution. Assuming they have the concessional contribution cap space, they could allocate that entire $50,000 as a concessional contribution by completing a NOIT form.
The super fund would then deduct 15% tax from the amount nominated. In this example, they would deduct $7,500 in super contributions tax. The previously non-concessional contribution would now become a concessional contribution and be reclassified internally in the super fund. The personal contribution is reported to the ATO as a concessional contribution, along with the 15% super contribution tax which is deducted. The super fund then issues a receipt, which the person would then take to their accountant at tax time, where it is then used to reduce their overall taxable income. As the person in this examples taxable income has now reduced from $100,000 to $50,000, they are now in a different tax bracket. It allows major tax saving opportunities, as they paid 15% tax internally on their super contribution, but are claiming their marginal tax rate (+ Medicare Levy) in tax.
If the same person salary sacrificed $50,000 (remember, this is before-tax money) they’d get the same tax benefits, but it would be harder to do a lump sum if there are not many pay periods left in the year. This is an example where carry forward concessional contributions are relevant.
From financial year 2017-18 to financial year 2020-21, the concessional contribution limit (cap) was $25,000. This was the total sum of before-tax contributions in that financial year. From 1 July 2021, the cap was increased to $27,500.
Legislation permits that if you didn't use your full concessional contribution cap for the financial year, you can carry forward the unused concessional contributions to future years. There are some qualifications investors need to meet, the main one being that your total super balance must have been below $500,000 in the previous year’s 30th of June. Further, you can carry-forward unused concessional contributions cap amounts for up to 5 previous years, but not before financial year 2018-19. This financial year (2023-24) is the first time people can carry forward from five years ago, as that legislation is now five years old. So, as any unused cap amounts are available for 5 years and then expire if unused, any unused concessional contribution cap amounts from financial year 2018-19 will expire if not used this financial year (2023-24). If you exceed the cap in any year, unused concessional cap amounts are automatically applied, and use the earliest unused cap amounts first (for example, if you exceed the cap in this financial year, unused cap amounts from financial year 2018-19 are applied first, before the later years)
In summary, the main things to consider are:
- Concessional contributions are before-tax contributions and include all employer, salary sacrifice and personal contributions (that have been claimed as a tax deduction via a NOIT form).
- Non-concessional contributions are after-tax contributions.
- When claiming tax deduction on a personal contribution, you’re changing from a non-concessional to a concessional contribution. This reduces your taxable income by the amount claimed, and results in a tax saving!
- Carry-forward concessional contributions use previous years (but no more than 5 years) unused concessional contribution cap amounts, and are a very handy tool for reducing tax!
