Concessional Contributions through Salary Sacrifice

Okay, so do you know what the title of this article means?

If you want to prepare in the most effective way you’re your retirement and if you don’t know what it refers to now, you really should.

But it’s like all new things isn’t it? It’s a mystery until you understand the terminology, so let me just fill you in on that quickly.

Superannuation contributions take two forms, “concessional”, which means they are made with income before it is taxed and “non-concessional”, which means they are made with income post tax. Now importantly each category of super contribution has a cap, which means that you can only make a certain amount of contributions to each every year, but more on that later.

Let’s first look at why making concessional contributions through salary sacrifice might be an effective strategy for and then you’ll be able to see if it’s relevant for you.

The key here is to understand how concessional contributions are treated tax-wise. Pre-tax contributions made to super are taxed at a concessional rate of 15%. This can lead to tax savings compared to having to pay tax on that income at your marginal tax rate outside super.

Going down this path is really a double win scenario in that you reduce your taxable income by salary sacrificing to make contributions and your contribution is also taxed at a lower rate than they would be if you weren’t funneling them into your super.

The statistics on the amount of Aussies who will have adequate funds to live comfortably on in retirement are not pretty. It makes good fiscal sense for the government to incentivise and encourage people to make super contributions of their own, and to see the advantages of doing this.

Now remember earlier I said you had to be aware of the capped amounts that it’s possible to contribute. Well it’s pretty important you’re aware of this stuff if you’re looking at topping up your super fund in this fashion because you can get caught out.

There are two caps you need to be aware of for 2014/15:

  • $30,000 cap for anyone aged 48 or under as at 30 June 2014
  • $35,000 cap for anyone aged 49 years or over as at 30 June 2014

What if you do inadvertently stray over the capped amount?

Well your excess concessional contributions will be included within your assessable income and will be subject to not only your marginal tax rate, but also an interest charge.

Now obviously there’s a lot more ins and outs than I’ve covered here, but that’s the basics.

If you think making concessional contributions might make sense for you and you would like more general information on the strategy feel free to contact one of our friendly Rate Detective consultants and they’ll be more than happy to provide general advice.

Published on June 6-th, 2015 in Superannuation
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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