Before tax vs after tax? How to sort out your Super
06 January 2020
When it comes to Super and Taxation, many Australians have a lot of questions. Are you unsure about how to make super contributions? Don’t understand the difference between concessional and non-concessional components? Have a mental blank when it comes to anything with the word ‘tax’ in it?
Let’s start fixing that.
When you pay money into super, how it’s treated depends on where the money comes from.
Before tax (concessional)
When your employer pays into your super fund - including super guarantee and salary sacrifice payments, it’s called a concessional contribution. This is your employer getting a concession in the form of a tax deduction.
When the money goes straight into super rather than paid to you as salary (where you’d pay income tax), concessional contributions are sometimes called before-tax contributions. Contributions paid into your super account receive a concessional (or lower) tax rate. They incur 15% contributions tax as opposed to your marginal tax rate.
If you pay money into super yourself and claim it as a tax deduction, then that becomes a concessional contribution as well. There’s a 15% tax on concessional contributions, so on a $1,000 contribution, you’ll have $850 in your fund after tax.
After tax (non-concessional)
If you contribute monies into super from your (net/after tax) pay or accumulated or savings – when you have already paid income tax yourself on the amount – and don’t claim a tax deduction, it’s called a non-concessional contribution.
There is no contributions tax on non-concessional contributions, so if you put $1,000 into super, you have the full $1,000 working for you.
Which one is best?
Well that depends on your personal circumstance, but if you only look at the numbers, making before-tax contributions can work best because paying 15% contributions tax is preferable than having the money paid to you as salary, if your salary is over $18,200. Income tax rates are between 21% - 47% including Medicare levy.
That relatively generous tax treatment means the government puts caps on how much you can pay into super each year. Before tax (concessional) contributions are capped at $27,500*, with after tax (non-concessional) contributions capped at $110,000*. Pay more and you could be slugged with penalties.
If you want to dig down into the detail, there are other differences as well:
|Before tax||After tax|
|Tax deduction on contributions||Yes||No|
|15% contributions tax payable||Yes||No|
|Annual contributions limit||$27,500*||$110,000*|
|Tax-free when withdrawn from super||Not always||Yes|
|Tax-free when paid to beneficiaries||Not always||Yes|
|Qualifies for spouse tax offset||No||Yes|
|Qualifies for LISTO||Yes||No|
If you'd like more information about contributions call us on 1800 692 877.
*From 1 July 2021. Prepared by BUSS (Queensland) Pty Ltd (ABN 15 065 081 281, AFSL 237860) as Trustee for BUSSQ (BUSSQ Fund, ABN 85 571 332 201). This information is general advice only and does not take into account or consider your personal objectives, financial situation or needs. Before acting, you should review the relevant Product Disclosure Statement to ensure you have all the information about the relevant BUSSQ product and how it works and consider the appropriateness of the information to your needs or seek independent advice from a properly qualified professional. Past performance is not a reliable indicator of future performance.