Super Contributions and Tax: Concessional vs Non-Concessional

Superannuation is taxed differently depending on how money goes in. Contributions made from pre-tax income are treated one way; contributions from money you have already paid tax on are treated another. Getting the category right matters, because each one has its own cap, and going over a cap has consequences.

Why super is taxed in layers

Super is designed to be taxed more lightly than ordinary income, to encourage saving for retirement. The trade-off is that money is generally locked away until you meet a condition of release, such as reaching preservation age and retiring. Tax can apply at three points: when money goes in, while it earns returns inside the fund, and in some cases when it comes out.

This article focuses on the first point, contributions. The ATO's super section at ato.gov.au/individuals-and-families covers the full picture, and the law itself is on legislation.gov.au.

Concessional contributions

These are contributions made from money that hasn't been taxed in your hands. The main types are:

• Super guarantee contributions your employer must make for you.
• Salary sacrifice contributions, where you agree with your employer to direct part of your pre-tax pay into super.
• Personal contributions you claim a deduction for, where you contribute from your bank account and later claim it in your return.

Concessional contributions are generally taxed by the fund when they arrive, at a contributions tax rate that is lower than most people's marginal rate. That gap is where the tax benefit comes from. For people on lower incomes, the gap can be small or even reversed, which is why the government offers the low income super tax offset to eligible people; the ATO pays it into their fund.

For people on higher incomes, an additional tax, often called Division 293 tax, can apply to some or all of their concessional contributions. The ATO assesses it after you lodge and explains the income test on its website.

Non-concessional contributions

These come from money you have already paid tax on, such as savings or an inheritance. Because tax has already been paid, they are generally not taxed again when they enter the fund. They don't reduce your taxable income either.

Non-concessional contributions have their own cap. A bring-forward arrangement can let eligible people contribute several years' worth of the cap at once, but eligibility depends on factors including your age and your total super balance. These rules are detailed and change from time to time, so check the ATO's current guidance before making a large contribution.

The category of a contribution is decided by where the money came from and whether a deduction is claimed, not by what you call it. A personal top-up becomes concessional the moment you claim a deduction for it.

Comparing the two types

Carry-forward concessional contributions

If you didn't use your full concessional cap in recent years, you may be able to use those unused amounts in a later year, provided your total super balance was below the relevant threshold at the end of the previous financial year. Unused amounts are only available for a limited number of years before they expire.

This can help people with irregular incomes, those returning to work after a break, or someone with a one-off high-income year such as a capital gain. You can see your available unused amounts in the ATO's online services through myGov.

Claiming a deduction for personal contributions

The process has a strict order, and getting it wrong can cost you the deduction:

1. Make the personal contribution to your fund from your own money.
2. Give your fund a notice of intent to claim a deduction in the approved form, within the time allowed.
3. Wait for the fund to send you an acknowledgment.
4. Claim the deduction in your tax return.

If you roll the money over to another fund or withdraw it before lodging the notice, you may lose the ability to claim. Also remember that a deducted contribution counts towards your concessional cap.

Other ways the government adds to super

Two further measures sit alongside the contribution rules and are easy to miss:

• Government co-contribution. Eligible lower and middle income earners who make personal after-tax contributions may receive a matching government contribution, up to a limit. You don't apply separately; the ATO works it out from your tax return and your fund's reporting. Eligibility depends on income tests and on part of your income coming from employment or business.
• Spouse contributions tax offset. If you contribute to your spouse's super and they have a low income, you may be able to claim a tax offset in your own return, subject to conditions.

Both depend on thresholds that change, so check the current rules on the ATO website before relying on them. They are also good examples of the difference between an offset, which reduces tax directly, and a deduction, which reduces taxable income.

Exceeding a cap

If your contributions exceed a cap, extra tax consequences follow. Excess concessional contributions are generally included in your assessable income and taxed at your marginal rate, with a tax offset for the contributions tax already paid, and you may be able to release some of the excess from your fund. Excess non-concessional contributions have their own treatment and release options. The ATO writes to you with a determination and your choices.

Excess contributions are often accidental, for example when an employer pays extra or a personal contribution is processed in a different financial year than expected. Checking your contributions in myGov before 30 June is the best prevention.

Frequently asked questions

Is salary sacrifice always worth it?

Not always. The benefit depends on your marginal rate compared with the contributions tax, and the money is locked away until you can access it. For people on lower incomes the tax benefit can be small, so it is a personal decision.

Where do I check my current cap usage?

Your contributions and any available carry-forward amounts are visible in the ATO's online services through myGov. Your fund's statements also show contributions received.

Do sole traders have to pay super for themselves?

Generally no, but they can make personal contributions and may be able to claim a deduction if they meet the conditions, including lodging a valid notice of intent with their fund.