There are two types of contributions that can be made to superannuation: Non-Concessional contributions and Concessional contributions.
They type of contribution made will affect whether it can be claimed as a tax deduction, how it will be taxed when withdrawn from superannuation and how it will be taxed when paid as a death benefit.
Non-Concessional Contribution Defined
What is Non-Concessional contributions? A Non-Concessional contribution is a superannuation contribution that is made using after-tax dollars.
A Non-Concessional Contribution will not incur any tax upon entering a superannuation account. It will also not incur any tax when withdrawn from super, either as a lump sum or income stream, regardless of age. However a superannuation condition of release needs to have been met under the retirement rules and definitions prior to accessing any superannuation balance.
Furthermore, a Non-Concessional contribution will not be taxed when paid as a death benefit.
Concessional Contribution Defined
The meaning of a Concessional Contribution is a contribution made to a superannuation account where a tax deduction has been claimed by the contributor.
An example of some types of Concessional Contributions are mandatory employer superannuation guarantee (SG) contributions, salary sacrifice contributions, self-employed contributions and personal deductible contributions.
Unlike Non-Concessional contributions, Concessional contributions incur contributions tax of 15% (increased to 30% for high income earners) upon entering a superannuation account. Concessional contributions also incur tax on super withdrawals when under age 60 and may incur superannuation death benefits tax if paid to a non-tax dependent.
Taxable vs Tax-Free Components
A superannuation balance consists of taxable and tax-free components.
Superannuation contributions are the main determinant of the tax component make-up of a superannuation balance.
Specifically, the tax-free component of a superannuation balance is calculated by adding up all of the Non-Concessional contributions that have been made to the account. The remaining balance is considered the taxable component, which is effectively the combination of all Concessional contributions made to the account, plus any positive or negative investment earnings, as formulated below:
Taxable Component = Total Balance – Non-Concessional Contributions
Because of this formula, it is actually possible for the Taxable Component to have a negative balance if the Total Balance of the account has fallen below the total Non-Concessional Contributions that have been made to the account.
Tax-Free/Taxable Account Based Pension
Non-Concessional and Concessional contributions can only be made to an accumulation account, meaning contributions cannot be made to a pension account.
On the day an account based pension income stream commences, the tax components of the superannuation account are frozen, expressed as a percentage of the total balance and remain static for the duration of the pension.
For example, if an individual starts a pension with a balance of $500,000, consisting of $100,000 (20%) tax-free component and $400,000 (80%) taxable component, the account based pension will forever remain a 20% tax-free / 80% taxable pension.
The importance of this is that all super withdrawals, including lump sums, pension payments and death benefits must be made proportionately from each component. Earnings within the account will also be applied proportionately.
Non-Concessional Contribution Cap Limit
The Non-Concessional contribution cap limit as of 1 July 2017 is $100,000. This is the maximum that can be contributed by any one person into their superannuation. The Non-Concessional contribution limit is applied against individuals not superannuation accounts. Therefore, having more than one superannuation account does not allow you to contribute more than $100,000 in Non-Concessional contributions over each financial year.
Non-Concessional Contributions Bring Forward Rule
While under age 65, an individual is able to ‘bring forward’ up to two years’ worth of their Non-Concessional contribution cap limit. The Bring Forward Rule is triggered in the financial year where an individual contributes more than $100,000, allowing them to contribute up to $300,000 at any stage over a three-year period, disregarding the annual Non-Concessional contribution cap.
Contributing more than the non-concessional cap could result in excess non-concessional contributions tax.
Non-Concessional Contribution Benefits
The benefit of a Non-Concessional contribution is that savings are invested within a superannuation account where earnings are taxed at a maximum of 15%. Capital gains tax reduces to 10% if the asset sold was owned for longer than 12 months. Therefore, the benefit of Non-Concessional contributions in dollar terms can be calculated as the tax on earnings within superannuation compared to how those earnings would be taxed if the individual invested in their own name and paid tax on the earnings at their marginal tax rate.
Non-Concessional Contribution Lifetime Cap
There was a proposal by the Government to introduce a lifetime cap of $500,000 for Non-Concessional Contributions; however this idea was replaced with the reduced annual cap of $100,000.
While there is no lifetime cap on Concessional Contributions, it should be noted that no further Non-Concessional contributions can be made by an individual who has superannuation and pension savings with a combined total of more than $1.6 million.