There is such a thing as free money. From the government. But there are some strings attached!
You may not be aware that the Federal Government runs a program called a ‘co-contribution scheme.’ The scheme rewards people for making non-concessional contributions to their super funds. Rewards are only available to people on relatively low incomes, who traditionally are discouraged from making extra contributions into super. That is, of course, the reason for the reward: the government wants to encourage people to save more for their own retirement.
How much free money you receive depends on a couple of things. Firstly, it depends on your income. Secondly, the amount that you receive is a function of the level of extra contributions you have made in the relevant year.
In keeping with the unofficial government policy (that everything about superannuation must be slightly more complicated than necessary), there are two relevant income thresholds. The lower threshold is $36,813 (in the 2017/2018 year). If your income is equal to or less than this amount, then the government will give you $.50 for every $1 of non-concessional contributions that you make in that year. If your income is more than this, but lower than the higher threshold of $51,813, then you will receive a lower rate of co-contribution. Of course, if your income is above the higher threshold you will not receive any co-contribution at all.
There is one more thing to keep in mind. At least 10% of your total income must be related to employment, which can include running a business. Basically, this means that you are not eligible for the co-contribution if your income is generated from something like investment activities such as rent received as a landlord or dividends received on shares. Basically, this is a benefit for people who are working at least a little bit.
You have to contribute
The government will only make a co-contribution on the first $1000 worth of non-concessional contributions you make. So, the maximum co-contribution you can receive is $500, which you would receive if you made the maximum personal contribution of $1000 and your income is below the lower threshold of $36,813. The following table, which we have borrowed from the Tax Office, shows the co-contribution amounts receivable for different levels of income and personal contributions in the 2017/2018 year:
The other thing to remember is that the government will only make a co-contribution for non-concessional contributions on your part. A non-concessional contribution is one for which you cannot claim a tax deduction, either directly in your own tax return or indirectly via something like salary sacrificing.
The flipside of a non-concessional contribution is that your super fund won’t pay tax on the contribution as income, either. The government co-contribution is not taxed. So, if you are below the lower threshold and contribute $1000 of your own money, the super fund will be left with $1500 with which it can invest.
How to use co-contributions
Co-contributions tend to be the ‘icing on the cake’ of comprehensive financial planning. Whenever we meet with clients we always consider potential eligibility for government co-contribution. After all, who does not want $500 if they can get it?
So, if you think that you would qualify for government co-contribution, don’t hesitate to contact us and we can look into this for you. At the same time, will happily do a full review of all your superannuation arrangements to make sure you are getting the maximum bang for your retirement buck.