Superannuation strategies

Uncovering the tax benefits of super!

July 2009
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If you want to engage in some light hearted dinner party conversation, you would put money on it that the complexities of super wouldn’t feature on the agenda! However, despite super at times being rather technical, it has a long list of potential benefits, particularly when it comes to tax. As well as helping you achieve a comfortable lifestyle in retirement, super is also one of the most tax-effective ways to invest your money compared to non-super investments. To encourage Australians to save for retirement, the Government has ensured a host of tax incentives are available for individuals within the super system. Let’s investigate some of these below.

Investment earnings

This is the money that you earn on your investments.

This is an agreement between you and your employer to contribute some of your salary or bonus directly into your super before tax is deducted at your marginal tax rate.

Salary sacrifice contributions are taxed at only 15 per cent rather than your marginal tax rate and Medicare levy. This strategy may allow investors to reduce their taxable income and build their retirement savings at the same time!

Ronald is aged 45. He receives a salary of $80,000 a year and is expecting a bonus of $5,000. His employer pays the minimum rate of employer contributions under law.

On the advice of his financial adviser, Ronald negotiates with his employer to have his bonus paid directly into his super fund, rather than receiving the money as cash salary.

As you can see from the above table, Ronald is paying $1,225 less in tax and therefore able to invest an additional $1,225 into his super. If Ronald were to adopt this approach on an annual basis until he retires at age 60, he would contribute an additional amount of $18,375 in his super. Plus, he has the benefit of investment earnings on his money over time.

Spouse contributions

These are contributions made to a super account on behalf of your spouse.

Tax benefits

Currently working

The partner making the spouse contributions may qualify for a tax rebate of up to $540 each financial year. Your spouse must have an assessable income plus reportable fringe benefits of less than $10,800 in the financial year in which you contributed at least $3,000 on their behalf. There are certainly benefits with both of you having money in super!

Pre-retiree
Contributing to super on behalf of a spouse can help reduce the tax payable by establishing two income stream investments (such as an account based pension), where you can take advantage of two sets of personal tax thresholds and the taxable income payments will qualify for a 15 per cent tax offset between age 55 and 59.

Government co-contributions

If your total income is less than $61,920p.a., you may be eligible to take advantage of the Government co-contribution scheme.

Tax benefits

For every after-tax dollar you contribute to super the Government will contribute $1.00 up to a maximum of $1,000 p.a. The maximum co-contribution of $1,000 may be payable if your income is $31,920 p.a. or less. The Government co-contribution reduces at higher income levels and cuts out completely when your assessable income (plus reportable fringe benefits) reaches $61,920.

Reaching retirement

Once you have reached preservation age¹, you’re eligible to start accessing your super benefits. You have the choice to slowly transition into retirement or launch straight in! (Note: If your preservation age is less than 60 you will be taxed at your marginal tax rate).

Tax benefits

Transitioning into retirement means you can reduce your work hours and supplement your reduced income with regular payments from your pension. As well as maintaining the same level of income you would receive working full time, you can also save on tax!
Once you reach age 60 and have met a condition of release there is no tax on any money you take out of super. You can also take a tax free portion of your cash up to $150,000 between age 55 and 59 if you have retired. Unlike other investments which could be subject to capital gains tax of up to 46.5 per cent (including Medicare levy).

Despite not being conducive to light hearted dinner conversation, super and its associated tax benefits are worthwhile knowing about. From attractive tax rates on investment earnings to receiving a super boost from the Government. Tapping into these tax advantages will only help build your retirement savings and place you on the path to achieve the lifestyle in retirement you aspire to.

For further information on any of the potential tax benefits mentioned, go to the Plum website – www.plum.com.au. Alternatively, contact a Plum Member Services Consultant on 1300 55 7586, any business day, Australian Eastern Standard Time (AEST).  

¹The Super facts guide (available online at www.plum.com.au)provides further information on preservation age.