Superannuation is for your retirement. You pay less tax to save more for later.
When you are old and no longer work, you hopefully have enough savings, superannuation or the age pension to live comfortably. But will you?
Saving for your retirement is tough – low wage growth, high marginal tax rates, HELP/HECS debt, mortgage, young kids, you name it – and so you probably won’t get far with this one.
Qualifying for the age pension is also tough and likely to get worse, since our current system is not financially sustainable for generations to come.
And so that means your super is all you will have left – unless you want to rely on family and friends, charity and welfare or crime and begging.
That is a lot of heavy lifting for your super to do. And so there are tax concessions to help you.
Your super comes with three tax concessions. You pay 15% tax on any income within super while in accumulation, 0% tax within super while in pension and 0% tax when you cash your super past 60 or 65 years of age.
This is what super is about. If these tax concessions didn’t exist, very few would consider contributing more than they absolutely have to.
Super comes with nice tax concessions, but also with not-so-nice strings attached. Especially four areas have the legislator’s full attention. How much goes into your super. What happens inside. How much moves into pension mode. And how much comes out.
How Much Goes In
What goes into your super is called a contribution. There is a mandatory and a voluntary part. The mandatory part affects your employer. The voluntary part just you.
It is mandatory for your employer to pay a superannuation guarantee (SG) on your behalf whenever they pay you $450 or more (before tax) in a calendar month. The current SG rate of 9.5% is applied to your ordinary earnings capped at the maximum super contribution base, which is $55,270 per quarter in 2019/20. These payments count as concessional contributions.
In addition to your employer’s SG payments, you can voluntarily make additional contributions into super (before-tax or after-tax) as long as you are below 65. Between 65 and 75 you can make voluntary contributions if you work at least 10 hours per week.
Before-tax means that somebody receives a tax deduction – this is called a concessional contribution. Your concessional contribution is capped at $25,000 per year and triggers 15% or 30% tax upon arrival in your super fund.
After-tax means no tax deduction – so this is a non-concessional contribution. Your non-concessional contribution is capped at $100,000 per year and only possible while your superannuation balance (TSB) – so everything you have in super – is below $1.6m. Non-concessional contributions don’t trigger any tax upon arrival in your super fund.
What Happens Inside
What happens inside is all about investment rules. Your super is yours but you can’t do with it whatever you want. There are six rules that are to protect your super – from you and your Part 8 associates. They are especially relevant for self-managed super funds (SMSF) since an SMSF gives you plenty of opportunity for chummy deals with your mates.
You must pass the sole purpose test and act at arm’s length. You must keep in-house assets below 5% of total assets. And you must neither acquire assets from related parties, nor acquire or hold assets for personal use, nor borrow money unless it is through a limited recourse borrowing arrangement (LRBA).
How Much Moves Into Pension Mode
How much moves into pension mode is all about transfer balance accounts and caps. Since funds in pension mode enjoy 0% tax, there is a cap on how much you can move into pension mode. That cap is $1.6m at the moment, but will increase with time.
What Comes Out
And how much comes out is all about conditions of release and benefit payments. The big draw-back of super is that you can’t access it for a very long time, usually until you hit 60 or 65. There are ways to access it earlier but those will cost you a fair bit of tax.
Your super is for your retirement. To keep it safe over all those years, it needs to go into a separate entity – a superannuation fund, also called a super fund.
You can join a government, industry or retail fund. Or you can set up your own superannuation fund – called a self-managed superannuation fund (SMSF).
A super fund consists of trustees and members. Trustees mange the fund and are the legal owners of any super assets, but hold these on behalf of members.
In an SMSF, you as the member are also a trustee – either an individual trustee or a director of the corporate trustee.
And so this is a very short overview of superannuation. Super is a complex topic and a highly regulated area. Please call or email us if you get stuck. There might be a simple answer to your question.
Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
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Last Updated on 14 March 2020
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We look after the tax and accounting of your business, wealth and SMSF. We are Chartered Accountants and Registered Tax Agents in Australia and IRS-registered CPAs in the US.