Superannuation
3. Superannuation Basics
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 27 Aug 2015
- Superannuation (super) is an amount of money accumulated over time that is used to provide for an individual’s retirement. It is like a bank account that cannot be accessed until a person reaches retirement age.
- Like a bank a super fund invests money in things such as:
- managed funds;
- shares and stocks;
- equities and securities; and
- property.
- Under a managed fund money from different investors is combined together and used to buy and sell assets on behalf of the investors. The investors are regularly paid an income or given a share of profits called a distribution.
- Buying shares in a company entitles a person to a share of profits in the form of dividends. The owner of the shares also benefits from an increased market cost of the shares.
- Generally a person’s super begins accumulating rapidly once they commence employment. The money in the super fund comes from three different avenues:
- concessional contributions including before tax contributions such as:
- employer contributions;
- salary sacrifice contributions; and
- personal contributions intended to be claimed as income tax deductions;
- non-concessional contributions such as after tax contributions; and
- government super co-contributions.
- Non-concessional contributions include after tax contribution such as self-contributions that are not included in the fund’s assessable income.
- For example you can contribute to your fund an inheritance you have received or profits earned from selling an asset.
- Non-concessional contributions for the 2014-2015 financial year will be capped at $180,000. This means if your total non-concessional contributions exceed this amount you will be taxed at the marginal tax rate of 47%.
- In Australia an employer must pay a minimum amount (currently 9.5%) of their employee’s salary and any contributions listed under an Industrial Award into a super fund. This is called the ‘super guarantee.’ To be eligible for the super guarantee:
- the employee must be 18 years or older and paid a gross income of at least $450 per month;
- employees under 18 years of age must also work more than 30 hours per week; and
- contractors who are paid for their labour are considered employees under superannuation law and are entitled to the super guarantee. To satisfy the requirements a contractor must be paid:
- for their personal labour and skills; and
- for the hours worked.
- A person may choose to ‘sacrifice’ a portion of their future gross salary (before tax) into their super fund through an arrangement made with their employer. This is called ‘salary sacrifice.’
- Depending on how much a person earns this may be an efficient way to increase the amount of money in their super fund. Contributions are also only taxed at 15% whereas the marginal rate of income tax can be up to 47-49%.
- Self-contributions (also called ‘personal contributions’) are contributions a person makes to their super fund from their net income (after tax).
- The government offers a ‘super co-contribution scheme’ under which a low-income earner (less than $48,516 for 2013-14 financial year) may receive a maximum of $500 as co-payment from the government into their super fund. To be eligible you must make an eligible personal contribution. The eligible amount varies depending on your income.
- For example if you earn $34,000 you must make a self-contribution of $1000 to receive $500 co-contribution from the government. You can check your super co-contribution entitlement and eligibility on the Australian Taxation Office website accessible through http://calculators.ato.gov.au/scripts/axos/axos.asp?CONTEXT=&KBS=superc_calc.xr4&go=ok;
- at least 10% of your total income must be from eligible employment or from carrying on a business;
- you must be less than 71 years old; and
- you must have lodged a tax return for the financial year.
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