The only way to avoid paying super contributions tax is to make a non-concessional contribution instead of a concessional contribution. Sure, you don't get to claim a tax deduction for non-concessional contributions, but you won't need to pay contributions tax either.
If you contribute too much to your super, you may have to pay extra tax. If you exceed the before-tax (concessional) super contributions cap, the excess is included in your income tax return and taxed at your marginal tax rate. You can choose to withdraw some of the excess contributions to pay the additional tax.
You may elect to withdraw up to 85% of your excess concessional contributions from your super fund to help pay your income tax assessment and ECC charge. Individuals who make contributions on or after 1 July 2021 that exceed their concessional contributions cap, will no longer be liable to pay the ECC charge.
Whether the money in your super account is tax-free or taxable when you withdraw it generally depends on the type of contributions made and whether tax was paid on it. Non-concessional (after-tax) contributions – those made from income after you paid tax on it – are tax-free when withdrawn from your super account.
Starting an income stream (super pension or annuity)
Investment earnings in super income streams are tax free, except in a transition-to-retirement pension where earnings are taxed at 15% until you retire or reach age 65.
By adding to super from your before-tax salary, you could reduce your taxable income and reduce your tax bill, while growing your retirement savings. Take a look at the benefits, caps and how to salary sacrifice.
Assume, for example, you will need 65 per cent of your pre-retirement income, so if you earn $50,000 now, you might need $32,500 in retirement.
If you're eligible to make tax-deductible super contributions, it's a strategy well worth considering. Not only will you boost your retirement savings, but you'll be doing it in the most tax-effective way.
Do You Declare Superannuation on Your Tax Return? Super contributions do not need to be included as taxable income on your tax return and no tax will be paid by you personally on super contributions; however, there are instances where super contributions need to be included in your tax return for other reasons.
The only way to avoid paying super contributions tax is to make a non-concessional contribution instead of a concessional contribution.
Understanding the types of contributions
Once the concessional contributions are in your super fund, they are taxed at a rate of 15%. You may need to pay extra tax if you exceed the concessional contribution cap.
Super is a great way to save money for your retirement. It is generally taxed at a lower rate than your regular income. You typically pay 15% tax on your super contributions, and your withdrawals are tax-free if you're 60 or older. The investment earnings on your super are also only taxed at 15%.
If you contribute more than $27,500 to super, the excess amount above $27,500 will be taxed at your individual tax rate – together with all of your other forms of taxable income. You will also have the option of releasing the excess amount from super.
If you're 60 and over, the income will generally be tax-free. If you're between your preservation age and 59, the components of your super will dictate how it will be taxed.
If you make $80,000 a year living in Australia, you will be taxed $18,067. That means that your net pay will be $61,933 per year, or $5,161 per month.
ASFA estimates people who want a comfortable retirement need $690,000 for a couple, and $595,000 for a single person when they leave work, assuming they also receive a partial age pension from the federal government. For people who are happy to have a modest lifestyle, this figure is $100,000.
According to the Association of Superannuation Funds of Australia's Retirement Standard, to have a 'comfortable' retirement, single people will need $595,000 in retirement savings, and couples will need $690,000.
So looking at the table, you can see that a 60-year old male will need a lump sum of almost $500,000 to provide an annual income in retirement of $42,000 for 20 years. These calculations are based on a 20-year time frame because the approximate life expectancy for Australian males is 84 years and 88 for females.
You can generally contribute more to your superannuation if you salary sacrifice than if you simply make voluntary contributions. Salary sacrificing may help you to reach your retirement savings goal sooner. Tax benefits over investment as earnings within a superannuation fund are taxed differently.
Super guarantee explained
Under Australian legislation, generally your employer must pay 11% of your salary into a super fund. It's designed to help you build up and save for retirement. Generally, you're entitled to Super Guarantee contributions from an employer if you are over 18 years old.
Pension payments are tax-free after age 60: Any super benefits, either pension or lump sum, paid to you after age 60 are tax-free.