Before-tax Contribution (Concessional Contribution)

What are Concessional Contributions?

Simply put, concessional contributions are payments made into your super fund from your pre-tax income. There are two main ways these contributions can happen:

• Employer Super Guarantee (SG): By law, your employer must contribute a minimum percentage (currently 11%) of your ordinary time earnings into your super fund. These contributions are concessional.
• Salary Sacrifice: This involves agreeing with your employer to divert a portion of your pre-tax salary directly into your super. This reduces your take-home pay but boosts your super balance with the tax benefit.

Why are They Tax-Effective?

Concessional contributions are taxed at a lower rate (currently 15%) compared to your marginal tax rate. This means you get a tax deduction for the money you contribute. For example, if your marginal tax rate is 32.5%, you effectively get a 17.5% tax break on your contributions. This translates to more money growing within your super fund for your retirement.

How Much Can You Contribute?

There’s a limit on how much concessional contributions you can make each financial year (from July 1st to June 30th). As of July 1, 2024, this limit is $30,000. This includes both your employer’s SG contributions and any salary sacrifice amounts. It’s important to keep track of your total concessional contributions to ensure you don’t exceed the cap.

Benefits of Making Concessional Contributions

• Tax advantage: The lower tax rate on contributions translates to more money growing in your super for retirement.
• Compounding interest: The earlier you start making contributions, the longer your money has to benefit from compound interest, significantly boosting your retirement savings.
• Potential for carry-forward unused cap: In some cases, you may be able to carry forward any unused concessional contribution cap from previous years to contribute more in the current year.

Things to Consider

• Your income level: The tax benefit of concessional contributions is generally greater for higher income earners who have a higher marginal tax rate.
• Contribution caps: Be mindful of the annual concestional contributions cap to avoid exceeding it and incurring extra tax.
• Super fund fees: Make sure you understand the fees associated with your super fund to maximize your returns.

Making Concessional Contributions

If you’re interested in making salary sacrifice contributions, discuss it with your employer. They can help you set up the arrangement to divert a portion of your pre-tax salary into your super.

Conclusion

Concessional contributions are a powerful tool to grow your retirement savings. By understanding how they work and the benefits they offer, you can make informed decisions about boosting your super and securing a comfortable retirement. Remember, consulting a financial advisor can provide personalized advice based on your specific circumstances.