Both concessional and non-concessional contributions are payments made to a superannuation fund, however they are taxed differently. There are also different contribution caps for each type.
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What are concessional contributions?
Concessional contributions are contributions into superannuation with funds which have been concessional taxed. Concessionally taxed means that the funds have not been taxed at your marginal tax rate. Concessional contributions are:
- Superannuation Guarantee (SG) contributions – these are compulsory contributions your employer must make on your behalf.
- Salary sacrifice contributions – these are contributions where you reduce your before tax income and instead direct it into your super fund.
- Personal deductible contributions – these are voluntary contributions made using after tax dollars, which you then claim a tax deduction for. This is primarily used by small business owners.
Concessional contributions will usually attract a 15% tax. This will be deducted from the contribution and is administered by the super fund. Concessional contributions are taxed because the funds being contributed have not yet been taxed.
It should be noted that if your income plus concessional contributions is in excess of $250,000 in a year, then the concessional contribution will attract an additional tax of 15%. This is known as the ‘Division 293 tax’.
What are non-concessional contributions?
Non-concessional contributions are when there has not been any concessional tax treatment of the contribution. Usually non-concessional contributions are where people contribute their own after-tax money into their super fund. Often people approaching retirement try to get their assets into the super environment so they can utilise the tax-free structure which superannuation pensions offer..
Non-concessional contributions do not attract tax when being contributing into a super fund; this is because you are contributing money which has already been taxed.
How much of each contribution can I put into super?
We have a fantastic superannuation system, especially when you reach pension age. As such the government does limit how much people can get into the superannuation tax structure. This is to prevent our retirement system being used simply as a method to preserve assets in a tax-free environment for estate planning purposes.
The concessional and non-concessional caps are listed here, as well as the historic limits.
Other differences between concessional and non-concessional contributions?
Concessional contributions are recorded as part of your ‘taxable component’ and non-concessional contributions are recorded as part of your ‘tax free component’.
Once in the fund, this has no bearing whilst you are alive as both components are taxed in the same way and there is no difference when you are receiving pension payments. But when you die, there is a significant difference in how these components are treated.
For some reason the government of the day approved the daft idea that the taxable component of someone’s super balance should be taxed at 15% (plus medicare levy) unless paid to your spouse or a ‘financial dependent’. For example, any taxable component in your super will be taxed at 15% (plus medicare) if paid out to an adult child. The reason this is daft is because someone on their death bed can withdraw their entire pension balance and then pass it to anyone they wish tax-free. The tax-free component will be tax free regardless of who it is paid to.
Good retirement planning factors this in when structuring assets for retirement.