Superannuation provides a tax-effective vehicle in which to accumulate wealth for retirement. Individuals are provided with tax incentives to grow their wealth through contributions into super funds and have the ability to invest these contributions according to their attitude to risk.
Like all good things in life, there are limits and superannuation is not exempt from this. At present, there are limits that apply to the amount that can be contributed to super. For individuals under age 49 as of 1 July 2014, a $30,000 concessional (or deductable) limit exists. Those aged 50 and over have a concessional limit of $35,000 per annum.
For self-employed persons, the concessional limit is of particular importance since it enables the individual to claim the superannuation contribution as a deductable expense against their taxable income. For those who are not self-employed, this limit is important to the extent that they are able to reduce their taxable income up to this level.
It is important to note that the concessional limit or cap includes all superannuation guarantee contributions (SGC) paid by an employer, and any salary sacrificed amounts (SS), personal deductable contributions, and other additional employer contributions.
For individuals who have the financial capacity, a non-concessional contribution (NCC) limit also exists. Individuals may contribute $180,000 per annum or alternatively for those aged under 65 years, up to $540,000 over a rolling 3 year period (under the ‘averaging rule’). Non concessional contributions are not taxed upon entering the super environment.
For those aged 65 to 74, a ‘work test’ must be satisfied to make any contribution to superannuation; this effectively requires an individual to confirm that he/she has worked for remuneration greater than 40 hours in 30 consecutive days. From 75 years of age and onwards, no further superannuation contributions may be made (unless they are mandated employer contributions).
Additionally, any income generated in the superannuation environment will be taxed at a maximum rate of 15% whilst capital gains will have a tax rate of 15% applied (to two thirds of the gain).
In summary, a tax deduction is achieved for concessional contributions placed into super, and a tax savings obtained on income and realised capital gains generated whilst within the superannuation environment.
One of the final benefits of our superannuation system is the ability to enjoy tax free investing when finally converting accumulated superannuation wealth to an income stream; commonly referred to as a pension.
An individual may convert their accumulated wealth to a pension income stream from age 55. All income and realised capital gain from this point onwards are entirely tax free within the pension fund. The actual income drawn will be subject to specific levels based upon an individual’s age (and increases over time to illustrate that accumulated superannuation capital was designed to eventually run-out). From age 55 to 59, income drawn from a superannuation income stream will be taxed according to an individual’s marginal tax rate less a 15% rebate. From age 60 onwards the income will be completely tax free.
The above represents some current rules that surround the superannuation environment they are by no means exhaustive and are subject to future government alteration. Taxation is only one consideration and it is important to consider your own financial circumstances, needs and objectives and to seek professional advice. Indeed it is likely that successive governments will adjust the rules and regulations that surround superannuation, however it is also relatively certain that with the exponential increase in Australia’s aging population, that these governments will continue to promote the use of superannuation and ensure that it remains a tax efficient and popular choice for individuals to grow their wealth for retirement.
This presentation article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence 238282. This article does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.