Superannuation is a way to save for retirement. Money is contributed to a superannuation fund (fund), either by a member of the fund or their employer. The fund then invests these contributions and, hopefully, the balance of the fund’s assets accumulates over time. Once a fund member retires or reaches a certain age they can access this money without incurring penalties.
Employers are required to contribute 9.5% of an employee’s salary into the employee’s nominated fund. This is known as Superannuation Guarantee (SG). These contributions are taxed in the fund at the rate of 15%, rather than in the employee’s own name at their personal tax rate. Employers are entitled to claim a tax-deduction for these contributions.
An employee may agree to sacrifice additional amounts of salary in order to receive greater superannuation contributions. To be effective, the agreement should be entered into before the employee’s services are provided.
A fund member may contribute their own money to their superannuation fund. In certain cases they will be entitled to a tax-deduction for the contribution. Broadly, a deduction is available to people who receive less than 10% of their income from employment activities. Examples of such people are the self-employed and those who receive more than 90% of their income from investments.
If the member is between 65 and 75 years of age they must be gainfully employed on at least a part time basis (this is known as satisfying the ‘work-test’). Once the member is 75 or older they can no longer make personal contributions to their fund.
The maximum amount that can be contributed to superannuation in a given year depends on the type of contribution and the age of the member.
The concessional contributions cap is $30,000 or $35,000 for those aged 49 years or over on 30 June 2015. Concessional contributions are also known as before-tax contributions. Examples of concessional contributions are employer contributions (whether SG or salary-sacrifice) and personal contributions where the member is entitled to claim a tax deduction.
The non-concessional contributions cap is $180,000, regardless of the age of the member. However, under a ‘bring-forward’ rule, three years worth of caps (i.e. $540,000) may be utilised in the one income year.
These caps are indexed periodically.
Excess Contributions Tax
There may be additional tax for those who exceed their contributions caps.
If the concessional, or before-tax, contributions cap is exceeded any contributions made above the cap, along with an interest charge, is included in the member’s assessable income. Members can choose to withdraw some of their excess concessional contributions to pay the additional tax.
If the non-concessional, or after tax, contributions cap is exceeded the member can choose to withdraw the excess non-concessional contributions, plus the earnings on those contributions. The earnings are then included in the member’s assessable income. If the member does not chose to withdraw the excess contributions they will be taxed at the top marginal tax rate.
Tax in the Superfund
Generally, the income of a superannuation fund is taxed at 15%. However, after-tax (non-concessional) contributions are not subject to any further tax in the fund. Furthermore, non-complying funds and special types of income are taxed at 47%.
Withdrawing the money
Generally, super cannot be accessed (without incurring severe penalties) until the member reaches their ‘preservation age’ (between 55 and 60, depending on their date of birth). Those under 65 who have not permanently retired may only be permitted to withdraw a portion of their entitlement each year. Superannuation may also be permitted to be withdrawn in cases of sever financial hardship, compassionate grounds, family law disputes and temporary residents departing Australia.
Superannuation for those on high-incomes
An employer’s SG obligations are limited to 9.5% of $50,810 per quarter. Therefore, an employee on an annual salary of $300,000 would be entitled to contributions of $19,308 (being 9.5% of $203,240) rather than $28,500 (being 9.5% of $300,000). This ‘maximum contributions base’ is indexed annually.
Taxpayer’s on higher-income levels may also subject to an additional charge, known as Division 293 tax. Division 293 tax is calculated by adding the value of before-tax (concessional) contributions to the taxpayer’s income. The portion of contributions above a $300,000 threshold is subject to 15% tax, in addition to the tax that applies to the superannuation fund.
Superannuation for those on low-incomes
Individuals on low-incomes may be eligible for a government contribution to help them boost their superannuation savings.
Those earning $37,000 or less may receive a low Income superannuation contribution (LISC) of up to $500 directly into their superannuation fund.
Those earning $50,454 or less may receive a government co-contribution. The federal government will add 50c to every dollar of after-tax (non-concessional) contributions made to the fund, up to a maximum amount of $500.
This information is intended to be an introductory guide for general information purposes only. It does not constitute advice. Readers are strongly advised to seek professional advice that is tailored to their particular circumstances.