Making a concessional contribution can be an effective way of reducing personal income tax. However, they are only effective if the member has sufficient taxable income to be able to benefit from the tax impact of the concessional contribution.
As concessional contributions are generally subject to contributions tax of 15%, they are only tax effective to the point where taxable income is reduced to the effective tax-free threshold. To the extent that concessional contributions are made beyond this point, the member may pay more tax overall than if they made a non-concessional contribution.
Effective tax-free threshold
When determining how much to contribute as a concessional contribution, it is important to consider the member’s effective tax-free threshold.
If concessional contributions made reduce a member’s taxable income below the effective tax-free threshold, they will not result in a personal tax saving for the member but may incur 15% contributions tax. The result is that more tax may be payable overall than if the member made a non-concessional contribution.
The effective tax-free threshold refers to the maximum level of taxable income where a member does not incur personal income tax. When determining the effective tax-free threshold, non-refundable tax offsets such as the Low Income Tax Offset (LITO), and Seniors and Pensioners Tax Offset (SAPTO) need to be taken into account.
The impact of these tax offsets is that the effective tax-free threshold is higher than the $18,200 tax-free threshold.
For members who are only eligible for LITO and are not eligible for SAPTO, the calculation of the effective tax-free threshold is straight forward. For both single people and members of a couple, the effective tax-free threshold is $22,575 per annum (2024/25). Details of how this threshold is calculated in ‘Resident individuals (not eligible for SAPTO)’ are provided below.
However, for members who are also eligible for SAPTO, the calculation of the effective tax-free threshold is more complicated. The reason is that SAPTO is based on ‘Rebate Income’ which amongst other things, includes amounts of salary sacrifice and personal deductible contributions.
This means that while making concessional contributions (within the concessional cap) will reduce taxable income, it will not reduce Rebate Income and therefore will not increase entitlement to SAPTO. This results in members with high levels of Rebate Income receiving lower levels of SAPTO which in turn results in a lower effective tax-free threshold. See ‘Resident individuals eligible for SAPTO’ below for more information.
It is important to note that the effective tax-free thresholds outlined in this article only take LITO and SAPTO into consideration. Higher effective tax-free thresholds other than those discussed below may apply where an individual is entitled to other non-refundable tax offsets (such as an Australian super income stream tax offset or a spouse super contribution tax offset).
FirstTech Comment
The Low Income Super Tax Offset (LISTO) effectively returns the 15% contributions tax paid on concessional contributions up to $3,333. LISTO is refunded to the super accounts of members with adjusted taxable income of $37,000 or less.
While LISTO effectively refunds contributions tax, making concessional contributions that are eligible for LISTO that cause taxable income to be below the effective tax-free threshold may still not be advantageous as it results in contributions forming part of the taxable (taxed) component, rather than the tax- free component which would be the case if they were made as non-concessional contributions.
In addition, if the member made non-concessional contributions rather than concessional contributions, they may be eligible for other superannuation concessions such as the Government co-contribution or spouse contribution tax offset.
Resident individuals (not eligible for SAPTO)
Singles or members of a couple who are not eligible for SAPTO have an effective tax-free threshold of $22,575 for the 2024-25 financial year (due to LITO).
Details of how the effective tax-free threshold is calculated are provided below:
$22,575
700
Nil
($700)
$22,575
$22,575 or less
Nil
Over $22,575
The lesser of:
• The difference between the member's taxable income and $22,575, or
• The member's available concessional contributions cap
FirstTech Comment
Due to the stage 3 tax cuts effective 2024/25, the lower marginal tax rate reduced from 19% to 16%. This effectively means that making a concessional contribution that reduces taxable income between the effective tax-free threshold and $45,000 will save only 1% personal income tax (16% marginal tax rate less 15% contributions tax). In addition, they will also save Medicare Levy of 2%, resulting in a 3% tax saving overall. However, the application of the LITO and LISTO further alters the amount of tax that can be saved.
Some clients with cashflow issues may prefer not to reduce their taxable income to below $45,000 and invest the additional cash flow amount elsewhere. For example, a non-concessional contribution that attracts the Government co-contribution or spouse contribution tax offset may be more beneficial.
Example 1
Paul is age 49 and not eligible for SAPTO.
He has taxable income of $45,000 in 2024/25 (before deciding to make a concessional contribution).
Paul’s available concessional contributions cap utilising the catch-up concessional contribution rules is $40,000.
When determining the amount to contribute as a personal deductible contribution, Paul should consider contributing the lesser of:
- The difference between his taxable income ($45,000) and the effective tax-free threshold ($22,575) = $22,425
- His available concessional contribution cap of $40,000
If Paul contributed up to his available concessional cap of $40,000, the additional $17,575 would not reduce his personal income tax liability or Medicare levy and he would pay $2,636.25 contributions tax on this amount which would not be payable if contributed as a non-concessional contribution.
The income tax and Medicare levy payable based on $45,000 income is $4,863. By making a personal deductible contribution of $22,425, Paul’s income tax and Medicare levy is reduced to $0, however, 15% tax applies to the $22,425 concessional contributions Paul made to his fund, which is $3,363. The total tax saving by adopting the personal deductible contribution strategy is $1,499.
Example 2
Paul from example 1 has taxable income of $30,000 in 2024-25 before deciding to make a concessional contribution. Paul makes a personal deductible contribution of $7,425 and claims a tax deduction to reduce his taxable income to $22,575 (ie his effective tax-free threshold).
Taxable income before personal deductible contribution
$30,000
$30,000
Personal deductible contribution
-
$7,425
Taxable income
-
$22,575
Tax on income
$1,888
-
LITO
($700)
-
Medicare Levy
$400
-
Contributions tax
-
$1,114
LISTO
-
($500)
Total tax payable
$1,588
$614
The total tax saving in this example by making a personal deductible contribution of $7,425 to super is $974.
Resident individuals eligible for SAPTO
For members eligible for SAPTO, the effective tax-free threshold considers LITO and SAPTO.
However, unlike LITO, the calculation of SAPTO is not based on taxable income alone.
SAPTO is based on ‘Rebate Income’ which includes:
- Taxable income (less FHSS released amounts)
- Reportable employer superannuation contributions (RESC) *
- Personal deductible superannuation contributions
- Adjusted fringe benefits
- Total net investment losses
As ‘Rebate Income’ includes amounts of salary sacrifice contributions and personal deductible contributions, making concessional contributions will reduce taxable income, however it will not reduce Rebate Income and therefore will not increase entitlement to SAPTO.
This results in members with high levels of Rebate Income receiving lower levels of SAPTO which in turn results in a lower effective tax-free threshold.
The following table outlines the effective tax-free threshold at various levels of rebate income for a single person eligible for SAPTO.
The maximum tax-effective concessional contribution is calculated as the lesser of:
- The difference between the member’s taxable income and their effective tax free threshold, or
- The member’s available concessional contributions cap
$35,813 or less
$35,813
$36,000
$35,667
$37,000
$34,886
$38,000
$34,105
$39,000
$33,324
$40,000
$32,542
$41,000
$31,761
$42,000
$30,980
$43,000
$30,199
$44,000
$29,417
$45,000
$28,636
$46,000
$27,855
$47,000
$27,074
$48,000
$26,292
$49,000
$25,511
$50,000
$24,730
$51,000
$23,949
$52,000
$23,167
$52,759 or greater
$22,575
* Employer superannuation contributions made on behalf of a client who has the capacity to influence either the size of the contributions or the way they are contributed. This includes salary sacrifice contributions but excludes contributions made by an employer to meet their superannuation guarantee liability. Contributions included in a client’s assessable income are also not RESC.
Example 3
Betty is age 67 and eligible for SAPTO.
She has taxable income of $45,000 in 2024/25 (before deciding to make a concessional contribution). Her Rebate Income is also $45,000 in 2024/25.
Betty meets the work test this financial year and is therefore able to claim a tax deduction for personal deductible contributions made after reaching age 67.
Betty’s available concessional contributions cap utilising the catch-up concessional contribution rules is $40,000.
When determining the amount to contribute as a personal deductible contribution, Betty should consider contributing the lesser of:
- The difference between her taxable income ($45,000) and the effective tax-free threshold ($28,636) = $16,364
- Her available concessional contribution cap of $40,000
Note that Betty’s effective tax-free threshold is $28,636, not $35,813 even though her taxable income is reduced below $35,813 after making a personal deductible contribution. As Betty’s Rebate Income is still $45,000 after making the personal deductible contribution, the reduced SAPTO results in an effective tax-free threshold of $28,636.
If Betty contributed up to her available concessional cap of $40,000, the additional $23,636 would not reduce her personal income tax liability or Medicare levy any further but her super account would incur an additional $3,545.40 contributions tax on this amount. If the additional $23,636 was contributed as a non-concessional contribution instead, her personal income tax liability and Medicare levy would still be zero and her super account would not incur any contributions tax on the non-concessional contributions. The Government co-contribution could also be payable if Betty makes a non-concessional contribution.
Members of a couple eligible for SAPTO
For members of a couple, eligibility for SAPTO is determined by the combined Rebate Income of the couple. For 2024/25, the couple must have combined Rebate Income less than $87,620 (or less than $100,104 if illness-separated).
Once they meet the eligibility criteria, the amount of SAPTO for each member of the couple is calculated separately based on their own Rebate Income. The calculation of SAPTO is further complicated by the ability to transfer unused amounts of the tax offset to their partner.
Note: for the purposes of this analysis, we will not include the transferring of unused SAPTO between spouses, and we have assumed that the couple are not illness separated.
The following table outlines the effective tax-free threshold at various levels of rebate income for a member of a couple.
The maximum tax-effective concessional contribution is calculated as the lesser of:
- The difference between the member’s taxable income and their effective tax free threshold, or
- The member’s available concessional contributions cap
$31,888 or less
$31,888
$32,000
$31,801
$33,000
$31,020
$34,000
$30,239
$35,000
$29,457
$36,000
$28,676
$37,000
$27,895
$38,000
$27,114
$39,000
$26,332
$40,000
$25,551
$41,000
$24,770
$42,000
$23,989
$43,000
$23,207
$43,810 or greater
$22,575
Example 4
John is age 67 and a member of a couple. He is eligible for SAPTO.
John’s taxable income is $38,000 in 2024/25 (before deciding to make a concessional contribution). His Rebate Income is also $38,000 in 2024/25.
John meets the work test this financial year and is therefore able to claim a tax deduction for personal deductible contributions made after reaching age 67.
John’s available concessional contributions cap is $23,510.
When determining the amount to contribute as a personal deductible contribution, John should consider contributing the lesser of:
- The difference between his taxable income ($38,000) and his effective tax-free threshold ($27,114) = $10,885
- His available concessional contribution cap of $23,510
Note that John’s effective tax-free threshold is $27,114 not $31,888 even though his taxable income is reduced below $31,888 after making a personal deductible contribution. As John’s Rebate Income is still $38,000 after making the personal deductible contribution, he will still not be entitled to the full rate of SAPTO. Therefore, the reduced SAPTO results in a lower effective tax-free threshold.
If John contributed up to his available concessional cap of $23,510, the additional concessional contributions of $12,624 would not reduce his personal income tax liability or Medicare levy any further but his super account would incur $1,894.10 contributions tax on this amount If the additional $12,624 was contributed as a non-concessional contribution instead, John’s personal income tax liability and Medicare levy would still be zero and his super account would not incur any contributions tax on the non-concessional contributions.
For more information see Effective tax free income thresholds for 2024-25
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Disclaimer
The information contained in this update is based on the understanding Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) has of the relevant Australian laws as at the article date. As these laws are subject to change you should refer to our website at www.cfs.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including AIL, nor CFSIL, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
AIL and CFSIL are also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.