BEGINNERS GUIDE TO SUPERANNUATION
Getting money into super - contributions
When money is placed into superannuation, this is known as a ‘contribution.’ There are two types of contribution: concessional and non-concessional.
Concessional contributions are ‘before tax’ contributions, meaning that they are made using income that is yet to be taxed. They include employer contributions (also known as super guarantee contributions or SGC), salary sacrifice contributions and any other contributions which a member has effectively claimed a tax deduction for. The term ‘before tax’ means that the member does not pay tax on the contributions before they are sent to the super fund.
Once they arrive in the fund, these contributions are generally taxed at 15%. Contributions on behalf of high income earners who have an adjusted taxable income in excess of $300,000 per annum are taxed at a higher rate of 30%. The income limit will fall from $300,000 to $250,000 from 1 July 2017.
To illustrate how this works, think of an employee earning $70,000 a year. Under the superannuation guarantee rules, her employer has to make a contribution worth 9.5% of her salary into super. This equates to $6,650. The employer pays this full amount directly into super. This is unlike the $70,000 paid to the employee, as the employer has to deduct the employee’s tax from that money.
Once the $6,650 is received in the super fund, the fund must pay tax of 15% on that amount. This leaves $5,652 in the fund.
Concessional contributions are taxed at a flat rate of 15%. This is less than the amount of tax that the employee would have paid had she received the extra $6,650 as salary. Her personal marginal tax rate is 32%, meaning that she would have paid $2,128 had the super contributions been paid as salary instead. This lesser tax rate within super is designed to encourage use of super, as well as to ensure that there is a greater level of savings in the individual’s hands when he or she retires. The fact that the contributions are subject to what is, usually, a lower rate of tax is one of the reasons that the contributions are described as ‘concessional.’
Employers are allowed to claim a tax deduction for amounts paid into super as concessional contributions. This is the same as what happens when an employer pays wages or salaries to the employee – the employer gets a tax deduction, and the recipient (the employee in the case of wages or salaries) pays tax.
Until 30 June 2017, individual super fund members can only claim a tax deduction for a concessional contribution if they are self-employed, substantially self-employed or not employed, and meet the ‘10% rule.’ The 10% rule states that a contribution is only deductible if less than 10% of the p 3 Beginner’s Guide to Superannuation member’s assessable income comes from employment sources other than self-employment (eg salaries, fringe benefits, termination payments). That is, a person with a full-time job as an employee and a part time job that is self-employed could not claim a deduction if they want to make personal concessional contributions.
This changes from 1 July 2017, from which time all members of super funds can claim a tax deduction for contributions up to the concessional contributions cap, provided they flag their intention to do so with the recipient fund.
Until 30 June 2017, there are limits on the amount of concessional contributions that can be made each year, depending on the age of the member. For members under the age of 50, the current cap for the 2015/16 financial year is $30,000 and for members over the age of 50 the cap is $35,000.
From 1 July 2017, the annual cap will change to be $25,000 for all people. However, for people with superannuation balances below $500,000, they will effectively be able to average this annual contribution out over a five year period. This means that if a member makes a contribution in one year of, say, $10,000, then he or she can make a concessional contribution in the second year of $40,000, such that the average across the two years is $25,000 per year. Basically, the cap becomes $125,000 over five years, but the average level of contribution cannot exceed $25,000 during the five year period. (That is, you cannot receive $125,000 in contributions in the first of the five years and then not receive any in the second to fifth years).
Contributions in excess of these caps will be taxed at the member’s marginal tax rate and included in the member’s non-concessional cap (see below), unless the member elects to withdraw the excess funds.
The member can elect to withdraw up to 85% of the excess funds. Until 30 June 2017, there are also age limits on what type of contributions the super fund can accept. There is no age limit for a fund to receive Superannuation Guarantee Charge (‘SGC’) payments, however after the age of 65 members need to meet a “work test” to be able to make voluntary concessional contributions. After age 75 the only concessional contributions that can be made into the fund are SGC payments.
From 1 July 2017, people aged between 65 and 75 will no longer need to meet the work test.
The work test
To satisfy the “work test” the member must be gainfully employed on a part-time basis during the financial year for at least 40 hours in a period of not more than 30 consecutive days. “Gainfully employed” means that the member is employed, self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or form of employment.
This test will no longer apply after 30 June 2017.
Non-concessional contributions are ‘after tax’ contributions which a member can elect to personally contribute. These contributions are not taxed going into the super fund, and they form part of what is known as the ‘tax free element’ within the fund. Members do not receive a tax deduction for these contributions.
The idea is that the money used to make the contribution has either already been taxed or would not be subject to tax outside of super, and that it would therefore be unfair to impose a tax within the super fund. For example, a person may decide to sell their home and downgrade to a cheaper one. Let’s say they sell for $750,000 and buy a new place for $600,000. As the family home is tax-exempt, the remaining $150,000 is not subject to tax. If the person wants to put that money into their super fund, they can do so using a non-concessional contribution, so that the super fund does not have to pay 15% tax when the money arrives in the fund.
The idea is that people should be encouraged to put their money into super, where it is kept to help fund their retirement.
There are limits on the amount of non-concessional contributions that can be made. Up until 3 May 2016, the cap was $180,000 for a given financial year. Members who were under the age of 65 could use the “bring forward” rules to contribute 3 years’ worth of non-concessional contributions (i.e. $180,000 x 3 = $540,000). If a member was under the age of 65 and they contribute an amount in excess of $180,000 they will automatically trigger the “bring forward” rules.
This all changed with the 2016 Federal Budget (3 May 2016). As of that night, there is a lifetime cap. The cap is the greater of: non-concessional contributions that had already been made as of May 3 2016, or $500,000. As of 3 May 2016, the Government stated that only 1% of people had made contributions of greater than $500,000. This means that, for the vast majority of people, the cap is $500,000.
Contributions that exceed the allowable cap will be taxed at the current highest marginal tax rate of 49%, and earning on the excess contributions will be taxed at the member’s marginal tax rate. The trustee of the fund is required to return the excess contributions to the member.
Until 1 2017, there are also age limits for non-concessional contributions. Once a member reaches age 65 they must meet the “work test” to be able to make non-concessional contributions. Once a member reaches age 75 the fund cannot accept any further non-concessional contributions. This work test will be removed from 1 July 2017.
NON-CONCESSIONAL CONTRIBUTIONS ARE NOT TAXED GOING INTO THE SUPER FUND, AND THEY FORM PART OF WHAT IS KNOWN AS THE ‘TAX FREE ELEMENT’ WITHIN THE FUND.
You may have heard the term ‘contribution splitting.’ A member is permitted to split certain contributions between themselves and their spouse by transferring the contributions they have made from their super account to their spouse’s account. The purpose of this rule recognises that (typically) female spouses have restricted work patterns compared to male spouses. Women often take time off work to have children and raise the family, which prevents them from accumulating significant funds in their super account. This concession is designed to recognise and address this imbalance.
The rules allow for up to 85% of a concessional contribution (that is, the amount that is left after tax) made in the previous financial year to be transferred to the spouse’s account. The funds that are transferred to the spouse are treated as a ‘rollover’ and not as a contribution, and so they do not get taxed again in the hands of the recipient.
As the funds were initially a concessional contribution, the funds will be an entirely taxable component and form a part of the recipient spouse’s taxed element in their fund.
While splitting was first introduced to allow for a non or low-earning spouse to effectively be superannuated, it is often used for more pragmatic reasons. There is no rule that benefits need to flow in a particular way (for example, from the member with a higher balance to a member with a lower balance). So, one common strategy is for a younger partner to split his or her contributions to an older spouse. The benefit here is that the money will generally become available sooner by doing this.
An alternative is to split contributions in such a way as to maximise Centrelink entitlements. This might mean deliberately minimising the super balance of one or the other spouse.