Below is an excerpt from the Life and Taxes: A Look at Life Through Tax book by Mark Chapman, available now on the CCH Bookshop.
As we progress through life, the amount we pay into superannuation tends to take on a greater importance. In our early working lives, our employers pay the standard 9.5% contribution into our super fund but (rightly or wrongly), few people proactively consider their superannuation or the retirement which it will have to fund.
As we get older, our incomes typically increase, giving rise to more disposable income, particularly as the kids fly the nest. Retirement itself — once a destination which was barely on the map — now appears alarmingly close and for many, that leads to a greater focus on boosting our superannuation.
According to recent estimates, a couple can expect to enjoy a ‘‘comfortable’’ retirement with a superannuation lump sum of at least $535,000 (assuming investment returns in retirement of 5% a year) in conjunction with a part-age pension. For a single person, the equivalent figure is $490,000. That translates to an annual income of $60,000 for couples or $43,000 for singles.1 Unfortunately, average superannuation balances at the time of retirement (assumed to be between 60 to 64 years of age) in 2013/14 were only $292,500 for men and $138,150 for women2 — well short of the figures required to support that ‘‘comfortable’’ retirement.
For many people, the middle years are the first time that they become aware of the disparity between what they have in super (and are likely to have if they continue down the same path) and what they would like to have. Realisation is then often followed by action, as people use part of their disposable income to top up their super.
Of course, superannuation isn’t the only way to save for retirement, but it is a very tax-efficient way. There are tax advantages when you first pay money into super, while the money is in your super fund and once it’s paid out. This chapter will focus on how superannuation is taxed and how you can maximise your savings through your super fund.
For comprehensive insight into this topic, you can also refer to our Australian Master Financial Planning Guide.
Tax on contributions
Make sure you have given your tax file number to your super fund or you could be paying too much tax.
First of all, for most income-earners, contributions paid into superannuation are typically taxed at much lower rates than other forms of income.
- Employer and salary sacrificed contributions are generally taxed at 15%.
- If you earn more than $250,000 (including reportable fringe benefit amounts and investment losses such as rental property losses), an additional 15% tax is payable on concessional super contributions, such as those made by your employer. This extra tax is payable after you lodge your tax return. You can either pay this extra tax from your own resources or arrange for your super fund to pay it out of your super account.
- Personal after-tax contributions and those received under the government’s cocontribution scheme are not taxed.
There are limits on how much you can contribute to super and there are penalties for going over these limits.
A great way to boost your super is to salary sacrifice some additional contributions into your fund. This basically involves arranging with your employer for some of your pre-tax wages or salary to be paid into your super fund rather than to you. You will save tax and boost your super.
By ‘‘sacrificing’’ some of your before-tax salary and putting it into your super fund, you get taxed at 15% on the additional contributions. If you normally pay income tax at a higher marginal rate than this, you will save tax. The higher your marginal tax rate, the greater the saving.
If you’re looking to salary sacrifice, always enter into a formal agreement with your employer which includes the details in your terms of employment. This ensures your employer calculates their 9.5% super guarantee contribution on your original salary.
Jane earns $90,000 before tax, excluding her employer’s super contribution.
Jane decides to salary sacrifice $10,000 of her pay into her super. Overall, she will be $1,886 better off.
|Jane||Does nothing||Salary sacrifices $10,000|
|Extra money into super||$0||$8,500|
|Net benefit||$69,068||$70,954 ($1,886 better off)|
This chapter from Life and Taxes: A Look at Life Through Tax also covers:
- Super concessional contribution caps
- After-tax contributions
- Government co-contributions
- Low income superannuation tax offset
- Making tax-deductible super contributions for the self-employed or non-employed
- Combining super funds
- Lost superannuation
- Superannuation before 1 July 2017
- Using discretionary trusts for tax planning
1 From ‘‘How much super do you need to retire comfortable?’’, 19 January 2017, at www.superguide.com.au/boost-your-superannuation/comfortable-retirement-how-much-super-need.
2 From ‘‘Superannuation account balances by age and gender’’ by Ross Clare, Director of Research ASFA Research and Resource Centre, December 2015, at www.superannuation.asn.au/ArticleDocuments/359/ASFA_Super-account-balances_Dec2015.pdf.aspx.