Blog » Should I pay more attention to Superannuation?

What is the government Co-contribution?

What is a ‘Transition to Retirement’ strategy and how does it affect me?
Superannuation is a hot topic and should be, considering it is the most tax efficient vehicle for savings in Australia. 

Whilst accumulating super the tax rate of the fund is fixed at 15%.

Pre tax contributions to the fund such as employer or salary sacrificed contributions are also taxed at 15% on entry to the fund.

After tax contributions paid into super do not incur a 15% contribution tax.

At present a person’s individual tax rates (inclusive of the medicare levy) on any monies earned is as follows:

$ 0 - $6,000 is tax free
$6,001 - $35,000 are taxed at 16.5%
$35,001 - $80,000 are taxed at 31.5%
$80,001 - $180,000 are taxed at 39.5%
Over $180,001 taxed at 46.5%

As you can see with the exception of the first $6,000 dollars earned, the tax rates applied in contributing to superannuation as opposed to taking income personally are lower than anywhere else.

Every $1,000 earned and received in hand, between $80,000 and $180,000 is taxed at 39.5% ($395), therefore a $1,000 gross is worth $605 net upon receipt.  If the $1,000 were paid directly into super the super fund would pay 15% tax being $150, but the net cost to your cash flow is in fact $605 as that is what you would have otherwise received after tax.  This represents a tax saving of $245 per $1,000 that is contained and held in the super fund.

Once your superannuation fund is in ‘pension phase’, ie drawing an income from the fund, the tax rate in the fund is 0%.  No income tax or capital gains tax is payable.  This is why superannuation is the most tax efficient vehicle that we have for wealth accumulation and retention. 

In addition Australian resident companies that issue dividends prepay the tax at the company tax rate of 30% before distributing them to shareholders, therefore once received, if your tax rate is 15% or 0% the value of the tax already paid is recredited to you in the form of a ‘franking credit’, this can provide a considerable boost to your actual investment return and contribute to the building of your superannuation assets.

Ideally having a large percentage if not all of our assets inside super once in retirement is a valuable position to be in, as far less pressure is placed on the assets to achieve the net income as a result of not having to pay tax.

In light of this the government has issued limits to the contribution levels which are:

1. $25,000 per annum for pre tax contributions (including employer contributions).
2. $450,000 averaged over 3 years for post tax contributions, unless over 65, where it is limited to $150,000 each year and requires a work test.

Government Co-Contribution

In order to provide an incentive for people to save the Government introduced the co-contribution system, whereby if an after tax contribution to super is made by an eligible person who earns $31,920 or less in any one financial year, the government will equal the payment up to a level of $1,000.

This means that if you contribute $1,000 to your superannuation fund, the government will then add a further $1,000 on your behalf.  As these contributions are after tax they do not incur a 15% contribution tax and the result of the benefit secures an immediate 100% return on capital in the year of contribution.  This is a strategy not to be overlooked.

Transition to Retirement Strategy

Since July 2005, once age 55, superannuation assets become available to make use of what is called a ‘transition to retirement strategy’ which essentially means that whilst still working the super fund is converted to pension phase and therefore internally tax free.  Income is drawn from the fund at a minimum of 4% (2% this financial year) whilst maximising tax deductible contributions from your employment into the fund with the net effect of a reduction in tax and a faster accumulation of wealth by diverting and containing monies that would otherwise be paid in tax to a superannuation fund.

Superannuation is a valuable wealth creation and retention tool and is worth understanding and building into your strategies.  It can however be a complex area so please seek advice.

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