Josh Pennell, Adviser - Wealth Management

Superannuation is a highly tax effective environment to invest your assets. Over the past decade successive Australian Governments have moved to simplify the legislation that governs Super.

However, there are still some important rules to follow in order to keep maximise the tax friendly environment super savings are maintained in. Firstly though, let's look at what the main advantages for Super are, and then at the implications of not meeting the rules:

Tax Deductions on Concessional Contributions

The main types of concessional contributions are Superannuation Guarantee Contributions (paid by employers for their employees, generally at a rate of 9% of salary) or salary sacrifice contributions, where you agree with your employer to sacrifice part of your salary into superannuation. This can potentially reduce the tax applicable to these funds from 46.5% to 15%.

Lower Tax Rates on Earnings and Capital Gains

When you are in accumulation phase (contributing to your super), the investment earnings within superannuation are taxed at just 15%, whilst capital gains can be taxed at low as 10% if the investment was owned for greater than 12 months. This is compared with tax rates of up to 46.5% for investments held in your personal name. 

Once you move your superannuation to pension phase (generally when commencing a transition to retirement strategy which is possible at age 55, or when retiring) the tax rate within your superannuation fund becomes 0% on both income and capital gains.

Low Tax Rates on Income and Lump Sum Withdrawals

Withdrawals from super can also occur at low tax rates, with the actual tax payable determined by your age, the components of your superannuation, and whether you are making an income or lump sum withdrawal. Between ages 55 to 60 some tax may apply to withdrawals but it is generally quite low, and once you reach age 60, all lump sum and income withdrawals are completely tax free.

As you can see, using superannuation to build your wealth and then drawing on it to meet your income needs through retirement can be much more tax effective than holding assets in your personal name.

So how can you get money in there to take advantage of this? 

There are two broad categories of contributions. Concessional contributions which have tax applied at 15% on the way into superannuation and are made using pre tax dollars, and non concessional contributions which have no tax applied on the way in and are made using post tax dollars.

What happens when you exceed the limit?

Below please find a summary of the contribution limits that apply and the implications of exceeding the limits.

Implications of exceeding contributions caps:

• Concessional contributions over the cap are taxed at 31.5%, in addition to the 15% contributions tax.  The excess contribution amount is also added to the individuals non concessional contributions cap for the year. Without proper monitoring, this may increase your non concessional contributions and trigger the bring forward provision without you realising and could lead to significant taxes as outlined in the below point.
• Non concessional contributions that exceed the cap can be taxed at an effective total tax rate of 93%.

Despite the Government's simplification of Super, there remain a number of important rules - especially surrounding the types and timing of contributions you can make, and just how much you can contribute. One things for certain, the penalties that apply if you get it wrong are steep, and will quickly erode the gains that Super is designed to deliver your retirement savings.