Superannuation

Superannuation - a tax-advantaged investment structure

Superannuation is the government sanctioned way of saving for your retirement; it's an opportunity to accumulate significant savings for the future.

Through concessional tax treatment, superannuation gives you a tax advantage that doesn't apply to other investments. This means superannuation can potentially leave you with more money for retirement when compared with your alternatives.

Superannuation is a product most of us use to save for our retirement as it allows us accumulate significant savings for the future, often with the assistance of our employer.

Superannuation is basically a managed fund. In return for special tax advantages that other managed funds don't have, your superannuation is usually not available to you until you retire (usually between the ages of 55 - 65). When you're thinking about superannuation, try not to get side-tracked by its complexities; focus instead on what it can do for you.

Contributions to superannuation

If you are less than 65 years old and have worked at least 10 hours a week at some stage in the last 2 years, you can contribute to superannuation. To contribute between the ages of 65 and 75 you must be working at least 10 hours in the week you make the contribution.

You can also make contributions on behalf of your spouse until they are age 65, or age 70 if your spouse is working at least 10 hours per week. Recent government legislation also allows you to contribute for children under the age of 18.

Employer contributions

If you are employed, your employer should be contributing some money into superannuation on your behalf. These compulsory contributions are called Superannuation Guarantee (SG) contributions. The SG is a percentage of your gross (before tax) income. The percentage amount from 1 July 2002 is 9%.

In addition, you may be able to increase the amount that your employer contributes to your superannuation account through “salary sacrifice.”

Personal contributions

Many people also decide to "top up" (increase) their contributions to help their superannuation grow even faster. You can do this by making extra contributions to your employer's superannuation fund or your own personal superannuation fund.

Personal superannuation contributions are generally made with after tax dollars. However, where a person qualifies as self-employed, they may be able to claim a tax deduction for the contribution.

Spouse contributions

Making contributions for your spouse will enable you both to take advantage of the tax concessions in superannuation. It will also allow both partners to use the retirement concessions on income streams, such as two tax-free thresholds. There are no limitations to the amount of spouse contributions you can make.

In order to make spouse contributions, the following conditions must be met:

Both spouses must be Australian residents for taxation purposes.
The recipient spouse must be less than 65
If the recipient spouse is over 65 they must be working at 10 hours in the week the contribution is made.

If you make a spouse contribution into superannuation on behalf of your spouse, you may be able to receive a rebate for the contributions.

What tax applies to superannuation?

Let's look at the tax that applies to superannuation in its three main stages:

When you contribute

At the point of investing your money in superannuation, any contributions made from your after-tax income (including spouse contributions) are not taxed. These are referred to as undeducted contributions.

If you are self-employed, and claiming a tax deduction for the contributions, or if your employer is claiming a deduction for contributing to superannuation for you, a maximum of 15% tax must be paid on these contributions.

While your money's invested

Once your money is invested in superannuation, the fund pays a maximum of 15% tax on any income and profits it makes on its investments. This is probably a much lower rate of tax than you pay on any income and profits from investments you have outside superannuation.

When you withdraw your money

The tax you pay on withdrawal depends upon factors such as your age, when you started work or contributing to superannuation, and the type of contributions that you made.

For example:

Undeducted contributions (your own contributions after July 1983 for which you haven't claimed a tax deduction) are repaid to you tax free.
Post June-83 taxed element (the balance of your benefit, excluding undeducted contributions) is tax free up to $129,751 if you cash your benefit after age 55. Any amount over $129,751 but less than $588,056 is taxed at 15%. ( plus 1.5% Medicare levy). If you are under 55, any amount is taxed at 20%. ( plus 1.5% Medicare levy).

+ Indexed annually in line with AWOTE (Average Weekly Ordinary Time Earnings)

However, tax on withdrawal can be avoided by purchasing a retirement income stream rather than withdrawing your benefits as a lump sum.

Is salary sacrifice effective?

Salary sacrifice has long been regarded an effective retirement savings strategy.

Salary sacrifice is where an employee agrees to reduce part of their gross salary in return for superannuation contributions made by their employer. These contributions are made on the employee's behalf using pre-tax income which, in many cases, can result in a net gain to the employee's after-tax position.

Some of the advantages of salary sacrifice are:

the employee's tax is based on their reduced salary, creating PAYG savings.
money entering the superannuation environment is taxed at a concessional rate of 15% (plus surcharge where applicable)
superannuation contributions made for employees are exempt from fringe benefits tax.
the employer may save salary on-costs, such as payroll tax and workers compensation charges (depending on the relevant State legislation).
the employer is not disadvantaged as they receive a tax deduction for salary expenses and superannuation contributions (up to the age based limit).
it enforces a retirement savings pattern.

Strategies for managing risk

The idea is to make sure you decide on a strategy appropriate for your goals and your investment timeframe, and that you understand the risks associated with each of the asset classes you've invested in.

Consider inflation

Inflation has the effect of reducing the buying power of your money. In other words, your money must grow over time by at least the rate of inflation. For example, living on $28,000 p.a. today is exactly the same as living on $50,000 p.a. in 20 years' time, if the inflation rate is 3% p.a.

If you leave your long-term super money invested in a conservative option, such as cash, you are running a greater risk that your money will not grow enough to beat inflation – let alone grow enough to increase your asset base.

Diversify your assets

Diversifying your investments – making sure that you never have "all your eggs in one basket" – is a good way of reducing your risk. This strategy acknowledges that various asset classes (and even sectors within asset classes) perform differently at various times. For example, there may be times when shares perform strongly and fixed interest doesn't. If you have all your money invested in fixed interest, you'll not only experience the poorer performance of fixed interest, you'll miss out on the good performance of shares.

You can diversify within each asset class as well. For example, sometimes industrial company shares outperform resource company shares, and at other times the reverse is so.

So, a spread of investments between asset classes, and also within those asset classes, gives your portfolio a better chance of doing well, no matter what is happening in the economy.

Timing the market

the time in the market is more important and more efficient than trying to time the market.

What tax deductions and rebates apply to superannuation?

Dependant upon your personal situation (such as your employment status, your age and your income) you may be eligible for one or more of the deductions or rebates that the government makes available when contributions are made to superannuation. Some of these are:

Self-employed contributions

Self-employed contributions are usually eligible for a tax deduction, depending upon the amount you contribute and your age.

From 1 July 2002, self employed people receive a tax deduction for the first $5,000 they contribute. For contributions over this amount they receive a 75% deduction up to the following age based limits.

E.g. For 2005/06

Age	Limit
Under 35	$17,804
35 to 49	$52,414
50 and over	$132,450

Changes expected for 1 July 2007

The government has proposed to abolish age-based deduction limits and replace it with a single annual contribution limit of $50,000, regardless of age. Transitional arrangements have been set for people aged 50 years and over who will be able to contribute to a limit of $100,000 per annum until 1 July 2012, when it will drop to a universal $50,000 per annum.

Co-contribution

The government will match a low-income earning employee's personal contributions to superannuation, up to a maximum co-contribution of $1,500. Where an employee's income is up to $28,000 per annum, the government will match their contribution up to $1,500. For incomes over $28,000 p.a. the $1,500 maximum reduces until it finally ceases at an income of $58,000 p.a. From 2007/08, the base threshold of $28,000 will be indexed to movements in Average Weekly Ordinary Time Earnings (AWOTE). The new measures relate to personal contributions made from 1 July 2003.

One of the most attractive features of the new co-contribution policy is its simplicity. You don't have to apply for a co-contribution, as the Government will pay it automatically to the Fund. The Fund will report to the ATO the contributions that you make (as it does now for the superannuation surcharge), and the ATO will match this against your income and forward the co-contribution directly to the Fund. The co-contribution is treated as an undeducted contribution and is therefore also tax-free when eventually paid.

Spouse rebate

Spouse rebate applies if you have a spouse who is not working, or is earning a low income, and you contribute to superannuation on your spouse's behalf. The rebate allows contributors to claim an 18 per cent tax rebate on contributions for spouses earning less than $13,800 a year up to a maximum contribution of $3,000 (which gives you a rebate of $540). Higher contributions can be made; however, the rebate doesn't apply on the excess.