Using superannuation as a savings vehicle is a tax-effective way to increase your savings to meet your retirement goals.
Benefits
Contributions into superannuation can be tax-effective, particularly if made under a salary sacrifice arrangement or if the contributions are tax deductible, because the contributions are effectively being made with pre-tax money.
The rate of return inside superannuation may be higher after-tax than investing outside superannuation. This is because earnings inside superannuation are taxed at a maximum rate of just 15%, whereas earnings from non-superannuation investments are generally taxed at marginal tax rates. This helps savings to grow faster.
Superannuation money is tax-free if withdrawn after age 60 (unless withdrawn from an untaxed fund).
Superannuation can be used to provide a tax-effective income stream in retirement.
How it works
Superannuation is a savings vehicle designed to help you save for retirement. Superannuation funds that comply with Australian law receive generous tax concessions which provide an incentive for you to save for your own retirement. Your account balance generally consists of contributions from your employer, your own personal contributions and earnings from investments.
Most superannuation funds will allow you to select how your money is invested and will usually offer a selection of investments based on local shares, property and or fixed interest. As different asset classes offer different levels of risk, it’s important to choose wisely and get advice.
Contributions
Eligibility to contribute to superannuation is based on your age. Anyone under the age of 65 is automatically eligible to contribute, but from age 65-75 you must meet a work test. Once you reach age 75, contributions generally cannot be made unless the contributions are mandated employer contributions required under an agreement or award.
Contributions to super are split into categories with caps applying to each category. The most commonly used caps are the concessional contribution cap and the non-concessional contribution cap. A CGT cap is also available to small business owners who sell eligible business assets.
The caps are intended to limit the amount of tax concessions relating to superannuation and to encourage people to save for retirement over a lifetime rather than only in the few years prior to retirement. Contribution caps are indexed periodically.
Concessional contributions
From 1 July 2017, your annual Concessional Contribution cap is $25,000. In addition, the removal of the age based caps (used in previous years) ensures that everyone has access to the same contribution limits and that tax is not applied on an age basis.
Concessional contributions generally consist of contributions made from pre-tax income (such as superannuation guarantee (SG) and salary sacrifice) or contributions for which a deduction has been claimed (personal deductible contributions).
If you exceed your concessional contribution cap, excess contributions are taxed at your marginal tax rate, less the 15% tax already deducted within the fund. An interest penalty will also apply. You can withdraw the excess from superannuation so it is not also counted towards the non-concessional contributions cap.
Catch up Concessional Contributions
From 1 July 2018, you may be able to accrue your unused Concessional Contributions and carry these amounts forward to enable you to make Concessional Contributions in excess of the annual cap in subsequent years. Amounts will be carried forward on a five year rolling basis. As the new regime will only apply to unused amounts accrued from 1 July 2018, the first year you may be eligible to use a carried forward amount will be the 2019/20 financial year. To make use of a carried forward Contribution Contributions, your super balance cannot exceed $500,000 on the 30 June of the previous financial year. Unused amounts which you have not used within five years cannot be carried forward.
Concessional contribution tax for high income earners
If your ‘income’ exceeds $250,000, some or all of your concessional contributions are subject to an additional 15% tax. Here, ‘income’ includes:
taxable income (including the net amount on which family trust distribution tax has been paid)
reportable fringe benefits
total net investment loss (including net financial investment loss and net rental property loss)
non-excessive concessional contributions.
The additional 15% tax applies to any non-excessive concessional contributions that result in your ‘income’ exceeding the $250,000 threshold during a financial year.
Non-concessional contributions
Non-concessional contributions generally consist of contributions from after-tax income, such as personal non-deductible contributions and spouse contributions.
The annual non-concessional contribution cap for the 2018/19 financial year is $100,000. But if you are under age 65 on 1st of July in a financial year you may be able to trigger the ‘bring-forward’ rule to make larger contributions.
The ‘bring-forward’ rule effectively groups contributions over a three year period. It allows you to bring forward two years’ worth of non-concessional cap and add it to the current year’s cap. But you can only contribute up to $300,000 over the three year period. This rule is particularly useful if you are selling a large asset (such as an investment property) and want to contribute the proceeds into superannuation. The bring-forward rule is automatically triggered if you exceed your annual non-concessional limit. Once triggered, your non-concessional contribution cap will not be indexed for the next two years.
If you do not fully utilise the existing NCC bring-forward limit of $540,000 before 1 July 2017 you will be subject to transitional provisions to determine your maximum available NCC cap. These rules are complex and you should consult with your financial adviser to determine your personal NCC cap.
From 1 July 2017 you must have total super savings of less than $1.6 million at 30 June to be eligible to make any NCCs the following year.
If you are utilising the bring-forward rule the limit will reduce if your total superannuation savings are more than $1.4 million on the 30th of June prior to the financial year in which you trigger the bring-forward rule. These rules are complex so it is important that you get advice.
If you exceed your non-concessional contribution cap, you can choose to have the excess contributions and associated earnings (as calculated by the Tax Office) refunded with penalty tax only applied to the earnings. If not withdrawn, the excess contributions are taxed at the highest marginal tax rate. The tax payable must be withdrawn from superannuation.
Conditions of release
To access your superannuation account balance you first need to meet a condition of release.
You will automatically meet a condition of release once you turn age 65. Prior to age 65, you can meet a condition of release if you (a) cease a gainful employment arrangement after having turned age 60 (even if you are still working in another job), or (b) retire after having reached your preservation age. Your preservation age is based on your date of birth.
In very limited circumstances a condition of release may be met before age 65 or retirement. These circumstances include being temporarily or permanently disabled, being in severe financial hardship or on compassionate grounds (e.g. to pay for medical costs).
Consequences
It is important that you keep track of your superannuation contributions to ensure you don’t exceed your contribution caps.
Superannuation may not provide a better after-tax rate of return than non-super investments if your marginal tax rate is less than 15%.
All contributions to superannuation are preserved until you meet a condition of release.
From 1 July 2017 the total amount of super monies used to start pensions will be capped at $1.6 million. All superannuation income streams are assessed against the transfer balance cap regardless of when it first commenced. You can retain excess amounts in your accumulation accounts where tax at 15% continues to apply.
Fees may be charged for your superannuation contributions and on transfers between funds. You should check the details in the fee section of your Statement of Advice and the Product Disclosure Statement (PDS) for your superannuation fund.
The government may change superannuation legislation in the future.
Date: 1 July 2018