Superannuation for employees

Books have been written on most of the matters covered below, so do not act in your own interests until you research further and get appropriate advice.

As an employee, how do I contribute to super?

You can sacrifice part of your salary into your super. Be sure it is in your contract of employment and ask your employer to do it in respect of future salary or wages. Make sure the arrangement is agreed and documented in advance. Also be sure salary sacrificing won’t reduce what your employer would otherwise contribute. Check that you stay within the concessional contributions cap of $25,000 pa, ($35,000 from the 2013/14 year for the over-60s) otherwise you may pay tax at the highest marginal rate.

How much does my employer contribute?

If you get more than $450 a month and are between the ages of 18 to 75, your employer should be contributing 9.25 per cent, from 1 July 2013, of your ordinary time earnings salary to your superannuation, on at least a quarterly basis. This rises to 9.5% from 1 July 2014 and thereafter at an additional half a percent a year until it reaches 12% from 1 July 2019.) You should ensure that you know how much needs to be contributed to your fund and you should receive an annual Members Statement from your super fund that verifies it. Put any questions to your employer and call the Australian Taxation Office Superannuation Helpline on 131 020 if you still need help.

What are the benefits to me of contributions?

The big advantage to you is that these contributions represent savings for your retirement. The employer’s element is compulsory and there are very attractive tax benefits.

Tell me about the tax benefits?

The employer contribution together with any salary sacrificed contribution up to the concessional limit of $25,000 ($35,000 from 2013/14 for over-60s) is a benefit to you that is not taxable in your hands (although it is included in the super fund’s assessable income and is subject to tax at 15%), but is still a deductible expense for your employer.

If this salary sacrificed contribution were instead taken as salary, you would pay tax at your marginal tax rate which could be as high as 46.5%, see personal tax rates table here.) So for those on the highest marginal tax rate, salary sacrifice is immediately saving you 30% in tax and the 1.5% medicare levy.

More about the other tax benefits below.

Does the government also contribute?

Yes the Australian Tax Office makes what is called a co-contribution (matching your own contribution at the rate of 50 cents for every dollar) of up to $500 a year providing you earn less than $33,516 in the 2013/14 tax year. This co-contribution reduces if your income is above $33,516 and cuts out altogether at an income level of $48,516 pa.

Can I contribute for my spouse?

Yes, if you make spouse contributions on behalf of your low-income or non-working spouse (or defacto), you may qualify for a tax rebate. The maximum tax rebate for a year of income is $540 and is available where a $3,000 spouse contribution has been made and your spouse’s assessable income and reportable fringe benefits is $10,800 p.a. or less. The rebate reduces by $1 for each $1 above $10,800 and reduces to zero when your spouse’s assessable income and fringe benefits reach $13,800 p.a.

Can I contribute to super from my savings?

Yes, if you choose, you can make additional contributions to your super from your after-tax earnings. There are known as non-concessional or undeducted contributions.

If you are 65 (on 1 July) or more you can contribute other savings (non concessional) you may have up to $150,000 each year.

If you are under 65 the non-concessional contributions cap is also $150,000 per person but you can bring forward two years of contributions, meaning you can contribute $450,000 in one go for the following three years. Any less than the $450,000 just means your total contributions over the next two years cannot exceed $450,000 minus the contributions you made in the year the bring-forward was triggered.

A person after reaching 65 is required to meet the work test of 40 hours in 30 consecutive days during the financial year to contribute up to $150,000 and can no longer take advantage of the $450,000 cap.

Your after-tax contributions up to the maximum are paid in tax-free but contributions made above the cap will be taxed at the top marginal rate and you must withdraw an amount equal to the tax liability from your super fund. The big advantage of making these contributions up to the cap, is that you may be paying tax on your investment income outside of super at the highest marginal tax rate but put it into super and you enjoy a tax rate of just 15 per cent on the earnings.

Are there any other benefits of super?

Yes, super funds may provide benefits such as life insurance cover and disability insurance which is available if you become disabled or sick for an extended period of time.

Does my super fund pay tax?

Yes it does at 15% of the contributions it receives from you (although you may get up to $500 of this back if you are on a low income) and at 15% on investment earnings unless your super fund is in pension phase. If it is in pension phase, investment earnings are not taxable unless earnings are above $100,000 a year in which event a new tax of 15% is imposed on the excess.

When can I get my super?

As a general rule you can access your super when you reach preservation age (see adjacent table) and retire or when you turn 65 (even if you are not retired). Note that if you have reached your preservation age you can reduce your working hours and top up your reduced income by drawing on your super. Transition to retirement is complicated and you should consult a professional on the rules. Your fund can also pay benefits in certain other circumstances such as incapacity, severe financial hardship, ‘compassionate grounds’, terminal medical conditions, death, if there are small balances involved or if leaving Australia permanently.

How do I take my super?

Super is taken either as a lump sum or an income stream or a combination of both. The tax implications need to be considered carefully - they are dealt with in the following paragraph.

As a lump sum

When you reach your preservation age, you can withdraw your super funds as a lump sum. But remember that generating income from non-super investments may not be a very tax-effective option. Also you may not be able to re-invest into super at a later date. If you choose to take your super as a lump sum, do so in the knowledge that you are then responsible for sustaining your lifestyle throughout your retirement.

As an income stream

You may take superannuation money as an income stream for retirement. The two main types of superannuation income streams are as pensions and annuities.

Note that the minimum annual payment amounts for superannuation pensions was reduced by 25% for the 2011/2012 and 2012/13 financial years, and returned to normal drawdown rates in 2013/2014 and future years. (For the 2009, 2010 and 2011 financial years, the Government permitted a 50% reduction in the drawdown rate on superannuation pensions, to compensate retirees for the effects of the global financial crisis on their superannuation investment value.) See adjacent table for rates.

As a lump sum and income stream

You may also take some money out of your superannuation as a lump sum and use the remaining balance to finance an income stream.

How much tax do I pay when I withdraw it?

The rules were simplified from 1 July 2007 and it now depends on when you withdraw it, whether the benefit is a lump sum or income stream and on whether any taxable component includes an element taxed or untaxed in the fund.   Most funds are taxed funds but the taxation of benefits can still be a very complex issue if your fund is not a taxed fund. So be prepared to get professional tax advice.

As a general rule super benefits (taken as a lump sum or pension) from a taxed fund are tax free if you are 60 or over. If you retire before the age of 60, then any pension or annuity (now referred to as super income streams) are included in your assessable income and taxed at your marginal tax rate. You may be entitled to a 15% tax offset of the taxable part of the income stream. Contact the payer of the pension or annuity for details.

A taxed fund is one where contributions tax was paid on the contributions made by your employer into your super fund on your behalf. Contributions tax will also have been paid for contributions made under a salary sacrifice arrangement.

When you receive your benefit, your super fund should provide you with a statement showing:

  the components of the benefit, including any untaxed and taxed elements,

  the tax withheld,

  any tax offset you may be able to claim, and

  any Capital Gains Tax that may apply to investments redeemed to provide the benefit.

What happens to my super if I die early?

Most funds let you nominate who you want your death benefit paid to, either as a ‘non-binding’ or ‘binding’ nomination. If your nomination is binding, the trustee of the fund is bound to pay the benefits to the beneficiaries nominated. A non-binding nomination provides guidance to the trustee who can still exercise discretion over who receives the benefit.

Be aware that if your super is paid to people who are not your dependants, it may be taxed. A dependant includes a minor child, a spouse, someone financially dependent on you, or with whom you're in an interdependent relationship.

I have more than one super account, what should I do?

If you have more than one super account you should try to get them consolidated. But before you request a transfer, check out the Exit Fees. They can be huge and you should try to determine whether it is better to cut your losses and transfer now or defer transfer until the fee reduces. Also remember you may be eligible for a higher benefit if you leave it in the fund until retirement and there may also be some benefit in not having all your eggs in one basket.

SPECIAL NOTE: To the best of our knowledge the above reflects the situation at the time of update, ie September 2013.