Superannuation is a very tax efficient way to save for your retirement. There are tax advantages when you first pay money into super, while the money is in your super fund and once it’s paid out (see our separate guide to the taxation of superannuation withdrawals).

Little wonder then that Australians have embraced superannuation, with recent figures putting the value of assets held in Australian superannuation funds at a staggering $1.6 trillion! So, what are the tax basics you need to know to understand superannuation?

Tax on Contributions

Tip:

Make sure you have given your Tax File Number to your super fund or you could be paying too much tax. First of all, for most income-earners, contributions paid into superannuation are typically taxed at much lower rates than other forms of income.

  • Employer and salary sacrificed contributions are generally taxed at 15%. 
  • Personal after-tax contributions and those received under the government's co-contribution scheme are not taxed.

There are limits on how much you can contribute to super and there are penalties for going over these limits.

Salary Sacrificing

A great way to boost your super is to salary sacrifice some additional contributions into your fund. This basically involves arranging with your employer for some of your wages or salary to be paid into your super fund rather than to you. You will save tax and boost your super.

By 'sacrificing' some of your before-tax salary and putting it into your super fund, you get taxed at 15% on the additional contributions. If you normally pay income tax at a higher marginal rate than this, you will save tax. The higher your marginal tax rate, the greater the saving.

Tip:

If you’re looking to salary sacrifice, always enter into a formal agreement with your employer, which includes the details in your terms of employment. This ensures your employer calculates their 9.5% super guarantee contribution on your original salary.

Super Concessional Caps

There is a limit on how much you can put into super each year by salary sacrifice. Most people can contribute up to $30,000, including your employer's 9.5% super guarantee contribution. This is called the concessional contributions cap. 

There are higher concessional caps for people closer to retirement. People aged 50 and over can contribute $35,000 including your employer's 9.5% super guarantee contribution.

If you'd like additional information, be sure to read our Salary Sacrifice case study below.

Case Study: Salary Sacrifice

Jane earns $90,000 before tax, excluding her employer's super contribution. Jane decides to salary sacrifice $10,000 of her pay into her super. Overall, she will be $2,400 better off.

Jane Does nothing Salary sacrifices $10,000
Take-home pay $66,953 $60,853
Tax $23,047 $19,147
Extra money into super $0 $8,500
Net benefit $66,953 $69,353 ($2,400 better off)

Assumptions: The figures used in this table are estimates only and are based on 2014/2015 income tax rates and a Medicare Levy of 2%.

After-Tax Contributions

After-tax contributions are known as 'non-concessional contributions' because you don't receive a tax deduction. Such contributions are the easiest way to top up your super as you simply deposit your own money into your super account.

If you have some spare cash, this is a great way to give your retirement savings a boost because the money is then in a low-tax environment, meaning you’ll get a better return than if you’d invested in the same assets outside super.

Contributions from your after-tax income don't get taxed when your fund receives them because you have already paid tax.

You can pay up to $180,000 in non-concessional contributions each year.

Government Co-Contributions

If you earn less than $49,488 per year (before tax) and make after-tax super contributions, you can get matching contributions from the government. This is called the government co-contribution.

If you earn less than $34,488, the maximum co-contribution is $500 based on $0.50 from the government for every $1 you contribute. The amount of the co-contribution reduces the more you earn and disappears altogether once you earn $49,488.

To get the co-contribution you simply need to lodge a tax return for the year. The ATO will then work out your entitlement and make the payment directly to your fund if you are eligible.

Low Income Super Contribution

If you earn $37,000 or less per year, the government may make a further contribution to your super. This amount, up to $500 annually, will be 15% of the before-tax contributions you or your employer made to your super account during the financial year up to a maximum of $500.

The ATO will automatically work out your eligibility (you don’t need to apply) and it will be paid directly into your super account. If you are eligible, you will receive the payment whether or not you lodge a tax return though if you don't lodge a return the process will be much slower.

Case study: Low Income Super Contribution

Gilbert earns $36,000 a year from his job in a supermarket. Gilbert’s employer has paid $3,330 into his super account this financial year.

When he lodges his tax return, the ATO calculates that he is eligible for a low income super contribution from the government and they accordingly pay $500 into his super account.

Tax on Superannuation Earnings

Income earned in your super fund is taxed at a maximum rate of 15%. This superannuation tax, along with any investment management fees, is deducted before your investment earnings are applied to your account. Capital gains on assets held for longer than 12 months within the fund are taxed at 10%.

If you're looking for help or advice with your superannuation, you may benefit from talking to a financial consultant or a tax advisor, such as from H&R Block. Contact us today for more information.

Please note: legislation is currently before Parliament which could impact your superannuation. Some of the information in this article may change. Contact your local H&R Block office for advice.

August 2016

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With over 440 offices staffed by over 2000 experienced tax accounting professionals, our tax accountants have the knowledge to walk you through the tax refund process with ease. We are committed to offering expert and personal service year-round at a location convenient to you. Find an office and book an appointment online.

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