If you salary sacrifice too much, you risk exceeding your concessional (before-tax) contributions cap, which can lead to additional tax on the excess amount, significantly diminishing the intended tax benefits.
Understanding the Concessional Contributions Cap
Salary sacrificing is an effective strategy to boost your superannuation savings and potentially reduce your taxable income. However, the Australian tax system sets limits on how much you can contribute to your super before tax without incurring penalties. This limit is known as the concessional contributions cap.
For contributions made within this cap, including those from salary sacrifice, your super fund generally pays a concessional tax rate of 15%. This rate is typically lower than an individual's marginal income tax rate, making salary sacrifice an attractive option for many.
What Happens When You Exceed the Cap?
When your total concessional contributions (which include your employer's Super Guarantee contributions, any salary sacrifice contributions you make, and personal contributions you claim as a tax deduction) go over the annual cap, the excess amount attracts additional tax.
Here's a breakdown of the consequences:
- Excess Contributions Taxed at Your Marginal Rate: Any amount exceeding the concessional cap is added to your assessable income for the financial year. This amount is then taxed at your individual marginal income tax rate, with an offset of 15% applied (because your super fund has already paid 15% tax on it).
- Division 293 Tax (for high-income earners): If your income for surcharge purposes (which includes your taxable income plus your concessional contributions) is above a certain threshold (e.g., $250,000 for the 2023-24 financial year), you will also pay an additional 15% tax on your concessional contributions. This effectively means a total of 30% tax (15% in the fund + 15% Division 293 tax) on contributions up to the cap for high-income earners, and your marginal tax rate plus Division 293 tax on the excess.
The Australian Taxation Office (ATO) will notify you if you've exceeded your cap and outline your available options.
| Contribution Type | Tax Rate (within cap) | Tax Rate (excess over cap) |
|---|---|---|
| Concessional (Before-Tax) | 15% (paid by super fund) + 15% Division 293 Tax* (if applicable) | Marginal Tax Rate (less 15% offset) + Division 293 Tax* (if applicable) |
Note: Division 293 tax applies to high-income earners, effectively adding another 15% tax on concessional contributions, including those in excess of the cap for those income thresholds.
Options for Managing Excess Concessional Contributions
If you find yourself in a situation where you've exceeded your cap, the ATO generally offers two main options:
- Release the excess amount: You can choose to withdraw the excess contributions (plus 85% of any associated earnings) from your super fund. This amount will then be included in your assessable income for the year and taxed at your marginal rate (with the 15% offset applied).
- Leave the excess in super: Alternatively, you can elect to leave the excess amount in your super fund. In this case, it will count towards your non-concessional (after-tax) contributions cap for that financial year. However, it will still be subject to the additional tax as described above.
How to Avoid Exceeding Your Cap
To prevent inadvertently over-contributing and incurring additional tax penalties, consider these proactive steps:
- Know Your Cap: Be aware of the current concessional contributions cap. Remember that you may also have unused cap amounts from previous financial years that can be carried forward, potentially increasing your current year's cap.
- Monitor All Contributions: Keep a close eye on all contributions made to your super fund. This includes your employer's Super Guarantee contributions, any salary sacrifice arrangements you have, and any personal contributions you intend to claim as a tax deduction.
- Regularly Check Your Super: Access your super fund's online portal or your MyGov account (linked to the ATO) to view your year-to-date contributions. This allows you to track your progress against the cap.
- Review Salary Sacrifice Arrangements: If you have an existing salary sacrifice agreement, review it periodically, especially if your income changes or if the superannuation cap amounts are adjusted by the government.
- Seek Professional Advice: Consider consulting a financial advisor or tax professional. They can help you plan your contributions effectively, understand complex rules like Division 293 tax, and ensure you remain compliant with superannuation regulations.
By understanding the rules and actively monitoring your contributions, you can maximize the benefits of salary sacrifice without facing unexpected tax penalties.
