Zest! / SUPER 101

The art of after-tax contributions

Cultivating an attractive superannuation balance requires patience, effort and working with restrictions. There are lessons we can learn about this from people who nurture miniature trees.

By Ofalyn Ayuk - 3 min 30 sec read


A little about Ofalyn

As a Member Solutions Consultant at Russell Investments, Ofalyn Ayuk understands all the ins and outs of super and retirement legislation, and loves to answer questions and help members.

In the ancient art of bonsai, a grower begins with a tree cutting or seedling and over time, with effort and ingenuity, transforms the sapling into a living artwork that is both beautiful and long-lasting.

While nobody wants to miniaturise their super balance like a bonsai tree, there are lessons we can learn from the bonsai master when growing and nurturing our retirement savings.

Sow the seeds and reap the benefits

For a start, bonsai masters tend their plants with a vision in mind of what the mature tree will look like. In much the same way, growing a super balance works best if you have a target in mind for what the result will look like. GoalTracker® can help you determine your own super target, in the form of a retirement income goal.

Growing bonsai trees takes patience, as does saving for super for the long term.

But the main lesson we can learn from bonsai involves working with constraints.

Bonsai masters produce their beautiful trees by using limits to their advantage. By planting in a pot that is large enough to promote healthy growth but restrictive enough to prevent the tree exceeding a maximum size, the plant grows to its optimal proportions. Adding enough water and fertiliser promotes healthy growth but too much can be as harmful as too little.

Cultivating a super balance requires a similar amount of care. Strict limits apply to the contributions you can add to your fund (going beyond these limits will result in having to pay a lot more in tax). However, these restrictions should not prevent you achieving an attractive result over time.

Working with constraints

In a previous article, we looked at growing super savings using before-tax (or concessional) contributions. These tax-effective contributions are generally limited to $27,500 a year. (You can take our quiz to find out which before-tax contribution option suits you.)

You can also add after-tax savings to your fund. Known as ‘non-concessional’ contributions, these are capped at $110,000 a year or $330,000 over three years.

Adding extra to your super while staying within these limits could help your account thrive and grow to an attractive size by the time you retire.

There is no tax to pay on after-tax contributions to your account, because as the name itself suggests, these contributions come from your after-tax income. Once in your account, income and capital gains made on the savings are taxed at 15 per cent rather than your marginal tax rate, making super a tax-effective environment in which to save.

But if you add too much to your fund, you will incur tax penalties which—like over-watering or over-feeding a plant—could be detrimental to growth.

Types of after-tax contributions

There are several types of after-tax contributions that count towards your annual limit. The best known is a contribution you make from your own after-tax savings, or a windfall amount you may come into, such as an inheritance or the proceeds of selling an asset.

Other types of contributions that count towards your after-tax contributions cap include:

  • contributions your spouse makes to your super fund
  • contributions someone other than your employer makes for you if you are aged under 18
  • most transfers from foreign super funds.

As a bonus, if your total income is less than the government’s higher income threshold for the financial year and you make an after-tax contribution to your super, you may even qualify to receive up to $500 as a top-up contribution from the government. Known as government co-contributions, these are not counted towards your after-tax contribution limit.

If you withdrew money using the COVID-19 early release of super program, you can also add these amounts back into your super via an after-tax contribution without counting them towards your after-tax contributions cap. If you're likely to exceed this cap with your re-contribution, you need to complete the Notice of re-contribution of COVID-19 early release amounts (NAT 75394) form. The deadline? It’s eight years away on 30 June 2030, so there’s plenty of time.

To help your super balance to thrive, you need to work patiently towards your goal while keeping within the restrictions, but like nurturing a bonsai tree, the constraints should not prevent you from achieving your own retirement income balance goal.

Fun fact: Bonsai is a traditional Japanese artform that has its origins in the Chinese art of penjing. The word bonsai literally means ‘tree or plant in a container or pot’, while penjing translates to ‘scenery or landscape in a container or pot’.

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