Saving for Retirement: Tax on Superannuation Contributions and Earnings

Superannuation is a very tax efficient way to save for your retirement and there are numerous tax advantages when you first pay money into super, as well as while the money is in your super fund and when it's eventually paid out. (To find out more about this, see our guide to the taxation of superannuation withdrawals).

Little wonder then that Australians have embraced superannuation, with recent figures putting the value of assets held in Australian superannuation funds at a staggering $3.2 trillion! But to get the most from your superannuation nest egg, it's crucial that you understand some of the tax basics.  

Here are some of the key things you need to know:

TAX ON CONTRIBUTIONS

Want to avoid paying too much tax on contributions to your super? Make sure you have given your Tax File Number to your super fund or you could be over-paying on tax as, for most income-earners, contributions paid into superannuation are typically taxed at much lower rates than other forms of income.

• Employer and salary sacrificed contributions are generally taxed at 15%  

• Personal after-tax contributions and those received under the government's co-contribution scheme are not taxed

There are limits on how much you can contribute to super and there are penalties for going over these limits.

SALARY SACRIFICING

A great way to boost your super is to salary sacrifice some additional contributions into your fund. To do this, you need to arrange with your employer to have some of your wages or salary paid into your super fund rather than directly to you. This will allow you to save on tax and boost your super.

By 'sacrificing' some of your before-tax salary and putting it into your super fund, you will only get taxed at 15%, although high income earners (those with income over $250,000) will be taxed at 30%. If you normally pay income tax at a higher marginal tax rate than this, you will save tax – and the higher your marginal tax rate, the greater the saving.

If you're looking to salary sacrifice, make sure you enter into a formal agreement with your employer.

SUPER CONCESSIONAL CAPS

Be warned, there is a limit to how much you can put into super each year as concessional contributions. This is called the 'concessional contributions cap'. Your concessional contributions include the total of your employer's  super guarantee contributions (11% for the 2024 year, increasing to 11.5% for the 2025 year), your salary sacrificed contributions and the contributions you have made to your super fund for which you are claiming a tax deduction. The concessional contributions cap for the 2024 years is $27,500, increasing to $30,000 for the 2025 year). 

If you did not use the full amount of your cap in earlier years, and your total superannuation balance is less than $500,000 at the end of the tax year prior to the contributions being made, any unused concessional contributions from the 2019 year onwards can be carried forward to be used in a future year. These unused concessional contributions must be used within 5 years.

Need a bit more help making sense of how salary sacrificing works? Here's a case study to help you understand the process:

In the 2024 year, Jane earns $90,000 before tax, excluding her employer's super contribution. Jane decides to salary sacrifice $10,000 of her pay into her super – and, overall, she will be $1,950 better off. Here's how the numbers break down:

Please note: The figures used in this table are estimates only and based on 2023-2024 income tax rates and a Medicare Levy of 2%.

AFTER-TAX CONTRIBUTIONS

After-tax contributions are known as 'non-concessional contributions' because you don't receive a tax deduction. These contributions are the easiest way to top up your super as all you need to do is simply deposit your own money into your super account.

If you have some spare cash, this is a great way to give your retirement savings a boost because the money is then in a low tax environment, meaning you'll ultimately get a better return than if you'd invested in the same assets outside super. Also, contributions from your after-tax income don't get taxed when your fund receives them because you have already paid tax – and you can pay up to $110,000 in non-concessional contributions during the 2024 year. This will increase to $120,000 in the 2025 year.

GOVERNMENT CO-CONTRIBUTIONS

If you earn less than $58,445 in the 2024 year (increasing to $60,400 for the 2025 year) and make after-tax super contributions, you are eligible to get matching contributions from the government. This is called the government co-contribution.

If you earn less than $43,445 for the 2024 year ($45,400 for the 2025 year), the maximum co-contribution is $500 based on $0.50 from the government for every $1 you contribute. The amount of the co-contribution reduces the more you earn and disappears altogether once you earn $58,445 for the 2024 year ($60,400 for the 2025 year).

To get the co-contribution you simply need to lodge a tax return for the year. The ATO will then work out your entitlement and make the payment directly to your fund (if you are eligible).

LOW INCOME SUPER TAX OFFSET

If you earn $37,000 or less per year, the government may make a further contribution to your super. This amount (up to $500 annually) will be 15% of the before-tax contributions you or your employer have made to your super account during the financial year, up to a maximum of $500.

The ATO will automatically work out your eligibility (so you don't need to apply) and it will be paid directly into your super account. If you are eligible, you will receive the payment whether or not you lodge a tax return – though if you don't lodge a return the process will be much slower.

CASE STUDY: LOW INCOME SUPER TAX OFFSET

Gilbert earns $36,000 a year from his job in a supermarket. Gilbert's employer has paid $3,600 into his super account this financial year.

When he lodged his tax return, the ATO calculates that he is eligible for a low income super tax offset from the government and they accordingly pay $500 into his super account.

TAX ON SUPERANNUATION EARNINGS

Income earned in your super fund is taxed at a maximum rate of 15%. This superannuation tax, along with any investment management fees, is deducted before any investment earnings are applied to your account. Any capital gains on assets held for longer than 12 months within the fund are taxed at 10%.

If you're looking for help or advice with your superannuation, please feel free to contact us any time to talk to one of our experienced financial consultants or a tax advisors here at H&R Block. Contact us today for more information.

Please note: Some of the information in this article may change due to changes in the laws governing superannuation in Australia. Contact your local H&R Block office for advice.