Everything you need to know about superannuation
On this page you will learn all the fundamental about Australian superannuation, the types of superannuation funds you will encounter, the types of superannuation contributions you can take advantage of, what the taxable components of super are, how superannuation funds are taxed internally and on capital gains, and how you accessing your super fund works.
Australian superannuation (“Super”) is a tax advantaged and mandated way of saving for your future retirement and makes up two of the three “pillars” of the Government’s retirement income policy. The three pillars are:
The Australian superannuation sector has grown to become one of the largest private pension funding arrangement in the world and consists of two distinct components: compulsory and voluntary.
If you work in Australia, your employer may have to contribute to a superannuation fund for you under the Superannuation Guarantee system if you:
In certain limited situations, and industrial award or workplace agreement may impose additional superannuation obligations of an employer. Superannuation payments are paid by your employer in addition to the salary or wages you receive. If you are eligible for superannuation, your employer will pay your superannuation directly into a superannuation fund.
Individuals may make their own personal and tax-deductible contributions and employers may make additional contributions for an employee, generally structured under a “salary sacrifice” arrangement. Salary sacrificed contributions are made from an employee’s pre-tax salary
There are several different types of superannuation funds. Knowing the different types of funds will make it easier for you to choose a fund that is appropriate for your purposes. Superannuation funds can be grouped into several categories. Features differ in each category.
Retail superannuation funds are usually run by banks or investment companies; their general characteristic of a retail superannuation fund are as follows:
Larger industry superannuation funds are open for anyone to join, however, some funds are restricted to employees in a particular industry. The main features of an industry fund are:
Public sector funds were created for employees of Federal and State government departments. Most are only open to government employees such as military. The main features of a public sector superannuation fund are:
A corporate superannuation fund is arranged by an employer, for its employees. Some larger corporate funds are 'employer sponsored' funds where the employer also operates the fund under a board of trustees appointed by the employer and employees.
Other corporate funds will be operated by a large retail or industry superannuation fund (especially for small and medium-sized employers). Features of a corporate superannuation fund includes:
An Eligible Rollover Fund (ERF) is a holding account for lost members or inactive members with low account balances. These funds often have low investment returns and may charge high fees. Your money is likely to grow faster if you consolidate your ERF with your active superannuation fund.
SMSFs are essentially do-it-yourself superannuation for those that want the hands-on control with their superannuation. However, with increased control come added workload in accounting and management typically. These funds can be suitable for people with large super balances and the abilities to manage the financial and legal requirements.
Importance of financial advice before making changes
Some Australian superannuation funds have exclusive benefits that can no longer be accessed once you move or consolidate with another fund. Moreover, having multiple funds can result it varying investment strategies, multiple administration costs and other risks. Consolidation can also result in the loss of insurances and other complications. It is recommended that you seek professional advice regarding your superannuation to ensure that it is structured properly to help you accumulate towards retirement.
When money is paid into a superannuation fund, it is referred to as a contribution. There are two types of contributions: concessional contributions and Non-Concessional Contributions (“NCC”).
Concessional contributions include contributions made by an employer, personal contributions that will be subject to a personal tax deduction, and any other contributions that are not a non-concessional contribution.
A non-concessional contribution is one that is made by an individual on their own behalf, or for their spouse, or children under 18 years of age.
A Non-concessional Contribution (NCC) is a personal super contribution made to a superannuation fund by an individual for their own benefit or for the benefit of their spouse or children under 18 years of age.
NCCs are generally made from after-tax income, from savings, and from the sale of other investments and assets. NCCs may also be made from inheritances, gifts, and windfalls.
The annual limit or ‘cap’ that applies to NCCs is $120,000 per annum, however up to three years contributions may be made in a single year in certain circumstances.
A NCC can only be made for an individual where they have a ‘total superannuation balance’ of less than $1,900,000.
The total superannuation balance is the sum of all amounts a person has in superannuation at the previous 30 June. This includes amounts held in both accumulation accounts and accounts paying a pension for income stream. Where a person is a member of a defined benefit or constitutionally protected fund, special rules apply to determine their total superannuation balance.
Three-year NCC bring forward rule explained
If a person was under the age of 75 at the start of the financial year in which they intend to make a NCC, they may be able to bring forward up to three years contributions.
The three-year bring forward rule is triggered when NCCs in a financial year exceed $120,000. When this occurs, the maximum that may then be contributed over the course of the next two financial years is $360,000, less NCCs made in years 1 (and 2).
If triggered in a previous year, the remaining balance of the three-year cap may be contributed, subject to meeting the general rules relating to contributions, including having a total superannuation balance of less than $1,900,000.
Where a person has a total superannuation balance of $1,660,000 or more, the amount that can be contributed under the three-year bring forward rule is scaled back and should be assessed according to the allowances at the time.
Taxation of non-concessional contributions
When a NCC is made to a superannuation fund it is not taxable in the fund, all of the contribution, less any entry fee charged by the fund (if applicable) is invested for the benefit of the person for whom the contribution is made.
NCC form part of an individual’s tax-free component within super. When the tax-free component is paid as either a lump sum or as an income stream, the benefit is tax-free in the hands of the recipient.
Investment earnings that accrue on the tax-free component of a benefit are added to the taxable component where the fund is in the accumulation phase and is apportioned between an individual’s taxable and tax-free components when the fund is paying an income stream.
Consequences of exceeding the non-concessional contribution cap for super
If NCCs exceed the allowable cap, the Australian Taxation Office will issue an excess NCC determination. Provided an election is made to withdraw the excess NCCs together with associated earnings, which are taxed at an individual’s marginal tax rate, no other penalty is applied. A 15% tax offset is provided to compensate for the tax paid by the superannuation fund on the associated earnings.
Where an election is not made within the prescribed time (within 60 days of the date the determination was issued), the Australian Taxation Office will tax the excess NCCs at a rate of 47%. The Australian Taxation Office has the power to order the compulsory release of excess NCCs from a superannuation, where the election is not made by the member of the fund.
Benefits of non-concessional contributions
Making NCCs to superannuation can assist increasing retirement savings and by adding a member’s tax-free component.
This may result in a member receiving tax-free lump sum and income stream benefits from their fund. Where member of a superannuation passes away, the tax-free portion of their accumulated savings is tax-free when paid to their legal personal representative (i.e., their Estate) or directly to other beneficiaries.
People making NCCs may be eligible to receive a government co-contribution and/or the spouse contribution tax offset.
Accumulated superannuation benefits may be classed as a taxable component and/or a tax-free component.
For those people with an accumulation account, the tax-free component will generally be made up of any non-concessional contributions they have made to the fund. The taxable component comprises of concessional contributions, and investment earnings that accrue of both concessional and non-concessional contributions.
When a person commences to draw an income stream from their superannuation fund, the taxable and tax-free components are crystallised at the time the pension commences. Future investment earnings are apportioned between the taxable and tax-free components.
When withdrawing money from superannuation, benefits are apportioned between the taxable and tax-free components in proportion. It is not possible to select that a partial withdrawal or income stream payment be tax from one component only.
Superannuation generally has many tax advantages but is not necessarily tax free, except in certain situations.
Non-concessional contributions are not taxed in the hands of the superannuation fund. However, non-concessional contributions that exceed the non-concessional contribution cap, are taxable in the hands of the person for whom the contributions are made.
Concessional contributions are taxed as income to the superannuation fund to which they are made. The rate of tax is 15%, however contributions for a person with an adjusted taxable income of more than $250,000 per annum, are taxed at a rate of 30%. This is referred to as Division 293 tax.
Income received by a superannuation fund on its investments is generally taxed at a rate of 15%. Where the superannuation fund is paying an income stream to a member or members, the income derived from the investments being used to support the income payments is generally not taxed within the superannuation fund. The tax exemption on earnings does not apply to pensions being paid under transition to retirement rules.
Capital gains made by a superannuation fund, subject to meeting certain taxation conditions, are taxed as income to the fund (accumulation account interests) however they may be subject to a 33.33% discount. Capital gains derived from the disposal of pension or income stream assets are generally tax free to the superannuation fund.
Lump sum benefits paid by a superannuation fund to it members are tax free to the extent the benefit is derived from a members’ tax-free component. Benefits that comprise of a taxable component are tax free if paid after the member reaches age 60. If aged under 60, the tax-free component of a benefit payment will be taxed on a sliding scale, depending on the age of the member at the time of withdrawing their benefit.
Where a benefit is paid in the form of an income stream or pension, the benefit will be tax-free once the member reaches age 60. When an income stream is paid to a person under age 60, the income may be taxable depending on the components of the benefit, and the age of the member at the time the benefit is paid. For those who are members of older style public sector superannuation funds, and constitutionally protected funds are subject to taxation treatment that differs from that mentioned above.
Most superannuation benefits are preserved, meaning that they cannot be accessed until such time as a “condition of release” has been met.
The most common conditions of release to access your superannuation fund include:
Specific restrictions apply to the release of superannuation benefits on grounds of temporary incapacity, reaching preservation age but not having retired, and in cases of severe financial hardship and compassionate grounds. Preservation age is currently 60 years of age.
Lump sum withdrawal of superannuation
Lump sum withdrawals are usually tax-free if you are over 60. If you are a public servant with untaxed super, you’ll probably pay tax.
Some of the benefits of withdrawing a lump sum can be:
The disadvantages of this are:
Income stream withdrawal
An income stream is paid when you commence to draw a pension from your superannuation fund or account.
The benefits from an income stream are:
The Government has set minimum amounts that must be withdrawn from your income stream each year. The minimum level of income you must draw is based on the balance of your superannuation fund at the beginning of the financial year, and a percentage factor based on your age. If you commence a pension part way through a financial year, the minimum income you must draw is pro-rated.
There is no statutory maximum to the amount of income you draw in a financial year unless your income stream is being paid under the “transition to retirement” rules. Where you commence a pension at any time between your preservation age and age 65, and you have not retired, the maximum amount of income you can draw each year is limited to 10% of your pension account balance.
It is recommended that you review the minimum income payment requirements provided by the government at the time you are seeking to exercise this option.
If you would like to discuss your options, we encourage you to simply request a call and we will reach out as soon as possible.
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Use the links below to access more information on superannuation to broaden your knowledge. We also provide advice on superannuation and can help you to review your super funds, consolidate multiple accounts, manage investments for the future and manage costs now to help you accumulate more in your super.
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