Tax benefits
Money earned on super investments are taxed at a maximum rate of 15 per cent, whereas earnings from non-super investments are often taxed at your marginal tax rate. This is the stepped rate of tax you pay on your taxable income. As you can see from the below table, this is often higher than 15 per cent. Depending on your circumstances this could help you keep up to 31.5 per cent more of your investment earnings. That’s a big difference!
| Taxable income |
Marginal tax rate (including Medicare levy) |
| $0-$6,000 |
Nil |
| $6,001-$35,000 |
16.5 % |
| $35,001-$80,000 |
31.5% |
| $80,001-$180,000 |
39.5% |
| $180,001 and over |
46.5% |
Salary sacrifice contributions
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.
Tax benefits
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!
Let’s look at an example of salary sacrifice.
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.
| |
Bonus as after-tax salary |
Bonus as salary sacrifice |
| Before-tax bonus |
$5,000 |
$5,000 |
| Less income tax at 39.5%* |
($1,975) |
Nil |
| Less contributions tax at 15% |
Nil |
($750) |
| Net amount to invest |
$3,025 |
$4,250 |
| Additional amount invested |
|
$1,225 |
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, Melbourne time.
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