Customer Education
Superannuation & Investments
How to contribute to your Super
- Introduction
- Who may contribute to super?
- Types of contributions
- How much should I contribute?
- Consolidating your super
Introduction
Super is designed to allow you to live comfortably in retirement by encouraging you to invest money during your working life. For many Australians, super along with their family home will comprise the majority of their investments.
The Government has made super more flexible and has introduced a range of tax concessions that make it an attractive investment for most Australians. These tax concessions apply to contributions, investment earnings and withdrawals (lump sum and pension payments) at retirement.
Due to Australia’s "ageing" population (lower birth rates than in the past as well as increasing lifespans) the Government is facing a major dilemma in its ability to pay age pensions in the future. As proportionately fewer working taxpayers support an increasing number of retirees, will the Government be able to afford to continue paying age pensions? Over the past two decades we have seen a gradual tightening of the rules that must be satisfied to allow an individual to qualify for an age pension. This means people need to consider saving over their working life to ensure they have a comfortable standard of living in retirement.
Who may contribute to super?
Any Australian can contribute to a super fund, provided they do so in accordance with super law, which does stipulate some conditions around what contributions can be made over age 65. The following table summarises the general age based conditions for making contributions into a super fund.
Your age |
Type of contribution into a super fund |
|||
Employer contributions on behalf of an employee |
By you |
By your |
||
| Compulsory employer contributions (super guarantee contribution or under an award) | Salary sacrifice and other voluntary contributions | |||
Under age 65 |
 |
|
|
|
| Aged 65 to 69 and you have been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days during the financial year in which the contribution is made. | 1 |
|
|
|
| Aged 70 to 74 and you have been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days during the financial year in which the contribution is made. | 1, 2 |
3 |
3 |
X |
| Aged 75 and over | 2 |
X |
X |
X |
2 Super guarantee is not applicable if you are aged 70 or over.
3 These contributions can still be accepted by a super fund after you turn 75, provided they are received by the fund anytime up to 28 days after the month on which you turn 75.
Types of contributions
There are two types of contributions that can be made into super:
- ‘concessional’ which means they are tax deductible to the contributor (eg compulsory employer and salary sacrifice contributions and deductible contributions made by self-employed people) and are taxed by the receiving super fund at up to 15%
- and
- ‘non-concessional’ which means they are sourced from after tax income and are not tax deductible to the contributor. These types of contributions include personal and spouse contributions and are not taxed by the receiving super fund.
Super Guarantee (SG)
Super assets in Australia have grown rapidly and currently amount to approximately $1.0 trillion (Source: APRA Quarterly Super Performance, December 2006). Much of this growth has resulted from the introduction of compulsory workplace super via industry awards and the Super Guarantee (SG). Subject to exceptions, in general, employers must contribute 9% of an employee’s earning base to a complying super fund. A complying super fund is a regulated fund which meets the operational standards set down by the Government.
The good news for you is that your employer will assist you in funding for your retirement via the SG contributions they make. There has been much debate as to whether the SG will be sufficient to retire on. Hence employees may be able to make further contributions themselves (ie after-tax contributions), or to factor extra contributions into their salary packages via a mechanism known as "Salary Sacrifice".
Salary sacrifice contributionsIf you and your employer agree, you may be able to arrange for your employer to make additional contributions to your super account from your before tax salary. This is called ‘salary sacrifice’. Salary sacrifice is classified as a concessional super contribution.
Salary sacrifice is allowed up to age 74 and may be a tax-effective way of making additional super contributions because the contribution made is generally taxed at only 15% instead of being taxed at your marginal tax rate (which may be considerably higher).
There is a limit on the amount of allowable concessional contributions that can be made to super each financial year. This limit is $50,000 per person, effective 1 July 2007, and is subject to annual indexation. Transitional arrangements apply to people aged 50 and over which allows a concessional contribution limit of $100,000 per annum (not indexed) from 1 July 2007 until 30 June 2012. Amounts in excess of this limit in a financial year (as identified by the Australian Taxation Office) will be taxed at an additional 30% plus the Medicare levy. This tax may be paid by the individual direct to the ATO, or can be withdrawn from the super fund. |
Salary sacrifice contributions may also be liable for tax when you make a withdrawal from your super account if you are under age 60 when you withdraw your benefit.
Self-employedIf you are self-employed you may be allowed to claim a full tax deduction for contributions you make to your super up to age 74. Self employed people can also elect to make personal non-concessional contributions to super and may be eligible for a Government co-contribution payment.
Personal contributions
In addition to concessional contributions, you can also make personal non-concessional contributions into your super account. If your employer agrees, regular personal contributions may be made via deductions from your after tax salary. You can also make a single ‘one-off’ personal contribution to help increase the benefits that you will receive when you retire.
If you are a low-income to middle-income earner, you may also benefit from Government co-contributions if you make a personal non-concessional contribution to your super.
There is a limit on the amount of non-concessional contributions that can be made to super each financial year. From 1 July 2007, this limit is a ‘capped’ amount of $150,000 per person (this amount may increase each year as it will remain fixed at three times the ongoing concessional contributions cap which is subject to annual indexation). People under age 65 will be able to average the capped amount over three years to allow larger one-off payments of up to $450,000 in a three year period. Where averaging has been triggered, the two future years’ entitlements are not indexed. Non-concessional contributions in excess of this limit will be taxed at the top marginal tax rate. This tax will be imposed on the individual, who must withdraw an amount from their super fund equivalent to the tax liability. |
Government co-contributions
The Government co-contribution is a payment made by the Federal Government to the super account of eligible people who make personal non-concessional super contributions. From 1 July 2007, self employed people may also eligible for the co- contribution subject to the below criteria.
The Government will match a person’s personal non-concessional contributions, at the rate of $1.50 for each $1 of contributions, up to the maximum amount designated for that person’s total income.
The amount of Government co-contribution that you could receive depends on your income and the personal non-concessional contributions that you make during the financial year. The maximum amount of Government co-contribution for a financial year is $1,500, which is available to people on incomes of $28,980 or less. The maximum amount phases out by $0.05 for every dollar of income that exceeds $28,980 until it phases out completely when a person’s income reaches $58,980.
The Government co-contribution will be made after a person has lodged their income tax return for a financial year.
A person is entitled to a Government co-contribution for a financial year if they:
- have made a personal non-concessional contribution to a complying super fund in the financial year
- have lodged their income tax return for the financial year
- have a total income (ie assessable income plus Reportable fringe benefits) of less than $58,980
- are not a temporary resident
- are less than 71 years old at the end of the financial year the contribution was made, and
- have earned at least 10% of their income for the financial year from carrying on a business, eligible employment or a combination of both.
The scaling of Government co-contributions from 1 July 2007 is shown in the following table.
If your personal super contribution is: |
||||
|
$1,000 |
$800 |
$500 |
$200 |
And your income is: |
Your super co-contribution will be: |
|||
$28,980 or less |
$1,500 |
$1,200 |
$750 |
$300 |
$30,980 |
$1,400 |
$1,200 |
$750 |
$300 |
$32,980 |
$1,300 |
$1,200 |
$750 |
$300 |
$34,980 |
$1,200 |
$1,200 |
$750 |
$300 |
$36,980 |
$1,100 |
$1,100 |
$750 |
$300 |
$38,980 |
$1,000 |
$1,000 |
$750 |
$300 |
$40,980 |
$900 |
$900 |
$750 |
$300 |
$42,980 |
$800 |
$800 |
$750 |
$300 |
$44,980 |
$700 |
$700 |
$700 |
$300 |
$46,980 |
$600 |
$600 |
$600 |
$300 |
$48,980 |
$500 |
$500 |
$500 |
$300 |
$50,980 |
$400 |
$400 |
$400 |
$300 |
$52,980 |
$300 |
$300 |
$300 |
$300 |
$54,980 |
$200 |
$200 |
$200 |
$200 |
$56,980 |
$100 |
$100 |
$100 |
$100 |
$58,980 |
$0 |
$0 |
$0 |
$0 |
For more information contact the Australian Tax Office (ATO) Super Hotline on 13 10 20.
Spouse contributionsSpouse contributions that are made to the Fund on your behalf are not tax deductible and are classified as non-concessional contributions.
Eligible spouses (married or de facto) who make super contributions on your behalf may be entitled to a tax offset of up to $540 pa for super contributions made, providing the spouse in respect of whom they are made is on a low income or not working.
The tax offset is generally equal to 18% of the eligible spouse contributions made, up to a maximum of $3,000. This limit reduces by $1 for every $1 of the receiving spouse’s assessable income and Reportable fringe benefits that exceed $10,800. No offset is available if the spouse in respect of whom the contributions are made has assessable income plus Reportable fringe benefits of $13,800 or more.
It is the contributor’s (ie the taxpayer’s) responsibility to maintain a record of eligible spouse contributions made for the purpose of claiming the offset.
These may not be paid into super from 1 July 2007 unless they were specified in a contract of employment, or payable under the law as at 9 May 2006. In these situations, they may be paid into super until 30 June 2012.
How much should I contribute?
The answer to this question can be complex and is influenced by a number of factors including:
- Will you own your own home in retirement?
- What other investments will you have in retirement? (In particular, what income will these other investments consistently produce?)
- At what age do you wish to retire?
- How many years in retirement are you planning for?
- Will your spouse also have an income stream?
- What will be the level of pension provided by the Government?
- What level of income do you require in retirement?
- What are your expectations for retirement? – will you be content to "potter around" the garden or will you want to travel extensively, eat out at restaurants, renovate your home, replace household whitegoods, upgrade your car etc.
- How much capital do you wish to leave for your dependants upon your death?
- What does the future hold for investment earning rates and inflation?
As you can see there are many issues to consider and, in some cases, difficult to foresee. When determining the income that you will require in retirement, it’s useful to know that many experts consider a range of between 60 - 70 % of your pre-retirement income as a desirable amount. This is due to the fact that in retirement you will not incur some of your current expenses, for example, travelling costs to and from work, purchasing clothing for work and other work related expenses. Also, hopefully by retirement any mortgage on your house should be paid off or close to being paid off and your children may not be financially dependent on you.
Your aim should be to accumulate sufficient super and/or investments, such that your desired level of income is sustainable in retirement.
We suggest you contact your financial adviser for a complete analysis of your needs. If you don’t have a financial adviser, we can put you in touch with one - contact one of our Customer Service Consultants on Freecall 1800 101 014, Monday – Friday 8.30-5.30pm (EST).
Consolidating your super
On average, most Australians hold 3 super accounts. This means:
- 3 sets of fees;
- 3 sets of paperwork; and
- 3 sets of hassle.
To make things easier for you, you may want to consider consolidating your super accounts into the one account. Speak to your Financial Adviser to see if this approach is right for you.
Should you choose to consolidate your super accounts into your TOWER account, we make it easy for you by liaising with your other super funds and transferring your other super accounts to TOWER.
