The superannuation system or “super” is a professionally managed fund set up for a private corporation employees’ retirement. It is basically a retirement income plan in which employers are required to separately contribute a minimum amount equal to 9.5 per cent of their employee’s wage on top of the basic pay.
That means employers will not use any portion of their employee’s pre-tax wage for the super contribution unless the employee agrees to do so.
Employees don’t need to do much other than choose from a set of super funds pre-selected by the company— at least if they are content with the guaranteed contributions from their employer.
No matter how convenient it seems, however, a basic knowledge on how super works would help you avoid complications and maximize your retirement savings. Here are some of the things you have to know about the super:
The only thing a person needs to qualify for a super is to be employed in Australia. Once employed, employers are required by law to give guaranteed contributions for your super account, except for those whose employers come from Norfolk Island because they have a different rate for contribution.
The company is required to provide a set of investment choices for their offered super funds. More often than not, companies hire professional fund managers to do this for their employees (for a fee), so try to compare fund management fees with those from other companies to determine if they are charging too much.
Types of contributions
Unlike the 401(k) in the US, Australia’s super already has a required contribution rate set in place for employers, which is equal to 9.5 per cent of the wage and is contributed separately. This means that an employer is required to give a guaranteed super contribution of $47.5 for an employee whose wage is $500.
The employer-guaranteed contribution is the most basic type of super contribution and is, by no means, a limit. Those who wish to bulk up their retirement fund may still add to their super through the following ways:
Salary sacrifice basically means an employee would insert some of their own money from their wage to their super. Those who wish to do this must discuss and arrange the terms with their employer because it could go four ways:
- The salary sacrifice could be contributed on top of the guaranteed contribution;
- The deducted amount could be inserted as part of the percentage for the guaranteed contribution, which would lessen the rate of guaranteed contribution. (i.e., the employer will only be required to contribute 3.5 per cent if an employee sacrifices a portion of their wage amounting to 6 per cent of the computed guaranteed contribution);
- The salary-sacrifice could come from giving up some fringe benefits offered by the company;
- If you sacrifice 9.5 per cent of your salary, your employer would no longer be required to give a guaranteed contribution since the minimum contribution is already being met.
Employees and employers may enter into an agreement with regard to the salary sacrifice, but it is up to both parties to ensure the terms are met, especially those who have only formed a verbal agreement.
Super co-contributions is a matching contribution coming from the government, but are only applicable to individuals within the lower income threshold.
As of fiscal year 2017-18, the government has set aside up to $500 for individuals who earn between $36,813 and $51,813, but the match contribution and lower income threshold change every fiscal year. Lower income individuals must also:
- not have a total super balance of $1.6 mil by the end of the previous fiscal year; and,
- not have exceeded their post-tax contribution cap in the current fiscal year.
The super co-contribution is computed and given sent to eligible individuals’ super automatically once they file a tax return with their Tax File Number (TFN).
Contributions, limits, and exceptions
There is actually no contribution limit for the super but a contribution cap for the total annual pre-tax contribution exists. The cap does not necessarily mean an employee may not add funds to their super, rather, it is the amount that guarantees that only the maximum income tax rate of 15 per cent will be applied to the super. Any amount in excess of the contribution cap means extra taxes to be paid, and these are usually bigger.
Contribution caps also depend on the age of the employee. The 2016-17 approved caps are $30,000 for people under 50 years old and $35,000 for those turning 50 (and older) fiscal year 2016-17.
There is an exception to the cap, but only if certain conditions are met.
Employees are allowed to contribute past the contribution cap if their super’s balance has not reached $500,000 by the end of the previous fiscal year and they have unused pre-tax contributions.
For example, 30- year-old employee A has a total super balance of $490,000 and a maxed out contribution cap by the end of the previous fiscal year but has only contributed $26,000 annually for the previous 3 fiscal years. He will then be eligible to contribute up to $12,000 more than the cap in the next fiscal year. He will not be eligible for the exception the following year because he will have reached a total superannuation balance of $500,000.
It is generally inadvisable to withdraw money from your super fund early but it is allowable in some cases, such as serious medical conditions, severe financial hardship, and withdrawals on compassionate grounds.
It is also possible to close the super account if the total balance is $200 or less.
Concessional contributions, or super contributions submitted before tax deductions are made, are generally taxed at 15 per cent but exceeding the contribution cap during the fiscal year could mean getting taxed at the highest marginal tax rate (up to 49 per cent).
If contributions are within the cap, however, taxes applied to withdrawals depend on whether the contribution comes from the taxable or tax-free component.
Contributions withdrawn from tax-free sources (contributions after tax deductions and those that the fund manager has paid 15 per cent tax on) can be withdrawn without getting taxed and at any age. Concessional contributions, or those that have been contributed pre-tax deductions, however, will be taxed depending on your current age, the preservation age, and whether you will receive it as a lump sum or an income stream.
Things to remember:
Super is compulsory for all employers but not all employers hire the same fund managers or choose the same super plans. This means employees who changed jobs may have more than one super fund to their name.
It is important to keep track of your super accounts and contributions to avoid extra taxes and to maximise earnings, so it is advisable for those with several super funds to combine them into one fund they prefer.
This information has been sourced from the Australian Taxation Office.