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How employer super contributions are taxed

Employer

20 March 2020 5 min read

By law, Australian employers are required to make compulsory contributions into their employees’ superannuation fund equal to a rate of 9.5% of their salary. This is called the Superannuation Guarantee (SG) and is a before-tax contribution. In addition to making these compulsory payments, employers need to pay payroll tax on these superannuation contributions for an employee or director. Employees also need to pay tax on these super contributions.

How are employer super contributions taxed

An employer’s tax obligations in super contribution

It’s the responsibility of every employer to ensure they pay payroll tax on the super contributions they make for an employee or director, this includes any contribution to superannuation, provident or retirement fund, or scheme.

Payroll tax applies to superannuation contributions for ”deemed employees”, these are contractors under a relevant contract and service providers under employment agency contracts.

Payroll tax on superannuation contributions:Payroll tax on superannuation contributions:

Payroll tax on superannuation contributions include:

monetary contributions such as cash payments and electronic transfers
non-monetary contributions such as marketable securities, property and forgiveness of loans

Employers who include non-monetary contributions in an employee’s taxable wages must provide evidence of the value if asked for by the relevant State Government authorities.

What is considered a taxable contribution?What is considered a taxable contribution?

A taxable contribution is one that an employer makes:

to a superannuation fund
to another form of superannuation, provident or retirement fund or scheme
as a Superannuation Guarantee charge (including nominal interest and administration component charges)
under salary sacrifice arrangements
as lump sum payments.

Employers can calculate their payroll tax using this formula.

Exemptions to payroll tax Exemptions to payroll tax

Superannuation contributions paid or payable to exempt employees, such as apprentices and trainees, are not subject to payroll tax. In addition, other SG charges, such as general interest and penalty charges, are not taxable.

How employees’ super contributions are taxed

All contributions paid into an employee’s superannuation account are taxed, but how much tax they pay generally depends on whether these contributions were made before or after they paid income tax, whether they exceed the super contribution cap or they are a high-income earner.

Let’s look at these scenarios in more detail.

Before-tax super contributions are taxed at 15% Before-tax super contributions are taxed at 15%

Any super contributions made into an employee’s account before tax (concessional) are taxed at 15% and this includes employer contributions, such as compulsory employer contributions and salary sacrifice payments made to your super fund.

Other before-tax contributions that will be taxed at 15% include contributions allowed as an income tax deduction, notional taxed contributions if the employee is a member of a defined benefit fund, unfunded defined benefit contributions, and constitutionally protected funds.

After-tax super contributions are not taxedAfter-tax super contributions are not taxed

AFor individuals, any extra super contributions made after tax (non-concessional) are not subject to tax. Types of after-tax contributions include:

contributions an employee or their employer make from after-tax income
contributions an employee’s spouse makes to their super fund
personal contributions that are not claimed as an income tax deduction.

Excess contributions may incur tax Excess contributions may incur tax

Making extra contributions to superannuation is a sure-fire way to increase super savings, but there are superannuation contribution limits set by the ATO.

These limits are on both the amount of before-tax and after-tax contributions an employee can make each year, and they vary depending on the financial year and an employee’s age. If an employee contributes too much to super, they may have to pay extra tax.

If they exceed the before-tax super contributions cap, the excess will be included in their income tax return and taxed at their marginal tax rate. In this scenario they can choose to withdraw excess contributions to pay the additional tax.

Those who exceed the after-tax contributions cap can choose to withdraw the excess contributions and any earnings. These earnings are then included in their income tax assessment and taxed at their marginal rate. If they don’t withdraw the earnings, the excess is taxed at 47%.