Pre-tax super contributions are a great way to boost your super balance, while also receiving a personal tax benefit in doing so.
There are a couple of different ways to make pre-tax super contributions, as well as limits on how much you can contribute each year.
Pre-Tax Super Contributions
Pre-tax super contributions, otherwise known as concessional contributions, are contributions made into your super account where the contributor claims a tax deduction for the amount contributed.
There are two ways you can make pre-tax contributions into your superannuation account:
- salary sacrificing into super; or
- personal concessional contributions into super.
Salary Sacrifice Contributions
Salary sacrificing into super is an arrangement you make with your employer to reduce your wage in exchange for equivalent, increased contributions into your super account.
For example, you may have a wage of $80,000 per year and decide to salary sacrifice $10,000 of this into super. Therefore, your new wage would be $70,000, plus $10,000 in additional super contributions.
The benefit of salary sacrificing is that you have a lower amount of income being assessed for tax at your individual tax rate. The downside, however, is that you will have less take-home pay and you are unable to access your super until retirement.
Salary sacrifice contributions are classified as concessional contributions, because your employer claims a tax deduction for making the contributions (as they would your wage).
Salary sacrificing is only available if you are an employee, not self-employed.
Personal Concessional Contributions
Personal concessional contributions have a similar outcome to salary sacrificing, but can be made whether you are self-employed or an employee.
Personal concessional contributions allow you to contribute money from your personal bank account into your super account and claim a personal tax deduction for that contribution when you are completing your tax return. The tax deduction will reduce the amount of your income assessed for income tax purposes.
Related article: Reportable Superannuation Contributions
How Do I Make Pre-Tax Super Contributions?
The process involved in making pre-tax super contributions depends on whether you intend on making salary sacrifice contributions or personal concessional contributions.
To make salary sacrifice contributions, you will need to notify your employer of the amount you would like to salary sacrifice into super, as well as the frequency. The frequency will often be determined by either how often you are paid your wage, or how often your employer makes the required mandatory superannuation guarantee (SG) contributions into your super account.
You will also need to let your employer know the name of the super fund you would like the contributions to be made to, or simply tell them to make the contributions to the same account that your SG payments are paid into.
To make personal concessional contributions, you will need to contact your super fund and ask them the process of how to make a personal concessional contribution. This will often be done as a direct debit or BPay payment into your super account from your personal bank account. But it doesn’t stop there. You then need to complete the required form from your super fund to state your intention to claim a tax deduction and then wait for your super fund to reply with confirmation.
It is imperative that this whole process is completed prior to lodging your tax return, rolling over your super, withdrawing your super, or using your super to start an income stream. Otherwise, you risk not being able to claim a tax deduction.
Are Pre-Tax Super Contributions Tax Deductible?
Yes, the very nature of a pre-tax super contribution is that they are either directly or indirectly a tax deductible expense. Specifically, a personal concessional contribution is a tax deductible expense because you claim a tax deduction for making the contribution. Salary sacrificing is effectively tax-deductible, because it reduces the amount of income taxed at your individual tax rate.
It’s important to note that all concessional contributions, including salary sacrifice contributions and personal concessional contributions incur contributions tax of 15% when entering your super fund. This amount is deducted from the contribution and the net amount is added to your super balance.
Pre-Tax Super Contribution Caps
The maximum pre-tax contribution amount that you can make into super is based on the concessional contribution cap. This cap limits the amount that can be contributed into super each financial year as a concessional contribution.
The concessional contribution cap for the 2024 financial year is $27,500 per person. The types of contributions that count towards the concessional contribution cap include:
- Mandatory Employer Superannuation Guarantee (SG) Contributions;
- Salary Sacrifice Contributions; and
- Personal Concessional Contributions.
An employee is able to make both salary sacrifice and personal concessional contributions, yet both will count towards the same contribution cap.
Pre-Tax Contribution Carry-Forward Rule
Any unused part of your concessional contribution cap from the 2018 / 2019 financial year onwards is able to be carried-forward for a rolling 5-year period. The carry-forward rule can therefore allow you to contribute more than $27,500 in a single financial year as a pre-tax contribution by utilising the unused carry-forward amounts.
However, you are only able to utilise the carry-forward amounts if your total superannuation balance was below $500,000 on 30 June of the previous financial year.
You can view your carry-forward contribution amounts by logging in to your myGov account, calculating it yourself based on previous year contributions, or speaking with your adviser.
Should I Contribute To Super Before or After Tax?
The decision to make before tax (concessional) or after-tax (non-concessional) contributions to super depends on your situation. This is generally a conversation you should have with your accountant.
The benefit of before-tax contributions is that you can reduce your personal income tax, while simultaneously increasing your super balance. However, these contributions will incur contributions tax.
The benefit of after-tax contributions is that you can increase your super balance without the contribution being subject to contributions tax, but you do not receive a personal tax deduction.
Importantly, before making any contributions to super, you should ensure you have enough income remaining to cover your general living expenses and understand that you won’t be able to access any amount contributed to super until you have reached your superannuation preservation age.
Contributions to superannuation can be a very beneficial strategy in not only increasing the amount invested in a concessionally-taxed environment, but also reducing your personal income tax along the way. However, getting it wrong can be costly or not optimising your contribution strategy can result in missed benefits.Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Salary Sacrifice Calculator
The calculator below helps you calculate how much you can contribute to super as a pre-tax super contribution, based on your wage and employer contributions.