Co-author: Justine Davies
If you’re in the workforce you need to understand what superannuation is and how much money you might be entitled to from your employer. You also need to understand how your superannuation might be taxed.
Generally, any before-tax money that you pay into your superannuation fund (for example, your super guarantee payment, or salary sacrifice payments) is taxed. The earnings that your fund makes are also taxed. However when you retire and draw an income from your super fund (which will turn into an account-based pension at that stage) this may be tax free.
The “objective” of superannuation has been the subject of much debate since March 2016 with the objective recently being defined as to provide income in retirement that substitutes or supplements the age pension.
That being the case and to hedge against Australians retiring with no savings and relying on state pensions to fund their later years, the government has developed a raft of alluring tax advantages to encourage savings within super funds.
The money that you have in superannuation can be taxed at three stages: when money comes into the fund (contributions), when it is in the fund (investment earnings) and when it leaves the fund (benefits). It’s important that you provide your tax file number to your super fund or you could be inadvertently paying too much tax.
Here’s a brief explanation of each stage and how different taxes & rates apply.
This is the tax deducted from any concessional contributions that you make. For the majority of people the rate of contributions tax is 15%. As an example, if your fund was to receive a concessional contribution of $1,000, contributions tax of $150 would be deducted, leaving $850 in your super fund account. Some high income earners (whose combined income and super contributions are more than $250,000 per annum) are charged a higher rate of contributions tax, currently an additional 15% on the lessor of the amount in excess of the threshold or concessional contribution. Your superannuation fund can provide more specific details of the contributions tax that will apply to you.
As you can see in the table below, a superannuation contributions tax of 15% is considerably lower than the marginal income tax most people pay annually.
|Tax rates for 2017–18|
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $87,000||$3,572 plus 32.5c for each $1 over $37,000|
|$87,001 – $180,000||$19,822 plus 37c for each $1 over $87,000|
|$180,001 and over||$54,232 plus 45c for each $1 over $180,000|
The above rates do not include the Medicare levy of 2%.
Tax on earnings
The money in your superannuation fund is earning an income. This may be via interest payments, share dividends, rental income, etc. The earnings within your superannuation fund are taxed at a rate of up to 15%.
Most withdrawals made from superannuation funds, provided the person withdrawing money is 60 or older, is tax free. The exceptions are if the beneficiary has not reached 60 years of age, the super fund is an untaxed fund (such as government super funds) or if the withdrawal exceeds the low rate threshold of $200,000 (lifetime limit, indexed annually). In these instances the amount of tax payable will depend upon the age of the beneficiary and/or the fund balance. Please seek advice from your accountant in this instance.
There’s no doubt superannuation’s attractive tax structure is a drawcard for those looking to maximise growth – and isn’t that all of us? For many taxpayers, the superannuation-related tax rates are lower than investing outside of a super fund. For example, owning the investments in your own name can potentially mean paying tax on income and capital gains at the top marginal rate of 46.5%. A super fund allows you to potentially ‘wrap’ a tax effective structure around investments although, as we have said, you should seek professional advice before deciding whether contributing extra to super is a good strategy for you.
In the market for a super fund? Or considering switching? If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group you selected.