Benefits of superannuation
Superannuation is designed to provide people with money for their retirement.
Unfortunately, few Australians enjoy a comfortable retirement. In fact, many retirees rely solely on the basic retirement benefits provided by the Age Pension.
Making contributions to your super fund for yourself, in addition to the contributions your employer makes on your behalf will speed up the rate at which your superannuation grows. You don’t just benefit from the actual amounts you contribute; the annual earnings on the contributions you make mean that you earn compound interest on a larger amount year after year.
In addition, depending on which method of contributing is the most appropriate for you in your particular circumstances you may:
- Improve the value your wage or salary has for you, by improving your income tax situation and/or
- Be in a position to benefit from the Government’s superannuation co-contribution scheme, whereby the Government pays additional money into your superannuation account
There are two methods of making additional contributions:
Before-tax (technically referred to as ‘concessional contributions’)
After-tax (technically referred to as ‘non-concessional contributions’)
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Before-tax super contributions
Employer Contributions
If you are employed and earn at least $450 per month, your employer is required to make regular superannuation contributions on your behalf equal to 9% of your ordinary time earnings.
The 9% Superannuation Guarantee Contribution (SGC) is the minimum requirement established by law. Some Awards, Industrial Agreements or employment contracts may establish a higher contribution level than the SGC, but they cannot offer less.
Income tax is not paid on the amount you receive as employer contributions; they are subject, instead, to the 15% Contributions Tax. This is deducted automatically by your superannuation fund.
Salary Sacrifice
Many employers offer their employees the option of packaging their pay so that some of it is not taken as wages or salary. One way of packaging your pay is to direct some of it straight into your super account as Salary Sacrifice Contributions, which are over and above the usual employer contribution.
Potential tax savings
Salary sacrifice contributions are paid into super without income tax being deducted. The 15% superannuation contributions tax is deducted from them instead and paid by the fund to the Australian Tax Office (ATO). Members on higher wages or salaries may make considerable savings on income tax by making salary sacrifice contributions into super.
The Government has caps on before-tax contributions that restrict the annual amount you can salary sacrifice into super without attracting a higher level of tax. For more information, go to: ato.gov.au
Warning: protecting other benefits
It is important to ensure that achieving a reduction in tax does not affect the basis on which other employment benefits are calculated.
Anyone considering making salary sacrifice contributions should make sure that they have a written agreement with their employer so that benefits calculated on the basis of their gross earnings ie. overtime, employer contributions into super and any allowances that are paid as a percentage of salary and wages, continue to be paid on the basis of pre-salary sacrifice income.
After-tax contributions
After-tax contributions, technically referred to as ‘non-concessional contributions’, are those that members pay into superannuation from money that has already been taxed, such as salary or wages on which income tax has been paid.
Advantages
- Depending on your income, you may qualify for the government co-contribution.
- They do not incur the usual 15% contributions tax.
- Depending on your spouse’s income, you may be able to receive a Spouse Tax Offset.
- If you are eligible to claim your superannuation before you turn 60 years of age you will not pay any tax on the component of your benefit that has accrued from after-tax contributions.
- If a member dies, none of their beneficiaries are required to pay superannuation death benefit tax on any amount accrued from after-tax contributions (in any event certain beneficiaries are not required to pay any death benefit lump
sum tax, eg. a spouse or dependent children under 18).
Co-contributions
The Government pay co-contributions into members’ superannuation funds if they made after-tax contributions to super during the previous financial year and their assessable income plus reportable fringe benefits plus amount salary sacrificed into super is less than $61,920 p.a. (2010/11). To be eligible you must be less than 71 years of age and working at least part time.
The maximum amount payable is $1,000 to people whose income is $31,920 or less and who make after-tax contributions totalling $1,000 or more during the year. The co-contribution amount then reduces progressively for people who earn more than $31,920 pa., and cuts out altogether when income reaches $61,920 p.a. The amount of the co-contribution also tapers, on a fixed scale, for after-tax contributions of less than $1,000 where the contribution required to qualify for the maximum level of co-contribution relative to income, is not made.
Limits on after-tax contributions
- The after-tax amount that can be contributed to superannuation in any single financial year is limited to $150,000 and subject to strict provisions
- However, until the end of the financial year in which a person turns 65, people are permitted to pay three year’s worth of after-tax contributions in a single year (ie. $450,000), but cannot make further after-tax contributions during the following two years
- To contribute to super, a person aged 65 to 74 must meet the employment test ie. 40 hours work in 30 consecutive days during the financial year
- After-tax contributions that exceed the limit are taxed at 46.5%