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Superannuation: How Does It Work For Employees In Australia?

Australia, like many other countries around the world, has systems in place to ensure that individuals continue to receive an income after they have retired. Generally, retirement income in Australia is funded with a combination of personal savings, government pensions and superannuation (or Super). Super consists of employer contributions, personal contributions, and in some cases, Government contributions. Money that is paid into a super fund is then invested by the trustee of the fund in accordance with your investment choice. Like any other investment, the intent is to increase your super account balance, over the long term, while you are still working. Once you’ve reached retirement age, your Super savings are generally converted to a pension that will provide a regular income for you to live on in your advanced years. Understanding how Superannuation works will help you make better choices for growing your super, so you can enjoy the retirement you deserve and have always dreamed of.retired senior couple dancing

Superannuation Entitlements

Australian residents who are employed, are 18 years old or over, and who earn $450 or more (before tax) per month are eligible to receive Superannuation Guarantee (SG) contributions from their employer. Your employment status, whether it’s full-time, part-time, or casual has no impact on your eligibility. For those under the age of 18, the same criteria applies, however, you must also work 30 hours per week or more. What’s more, even employed temporary residents of Australia are entitled to superannuation. Some employers are not required to make SG contributions for employees, this includes employees that are paid for private or domestic work for less than 30 hours a week. Non-Australian residents working outside of Australia, those holding a specific class of Visa, and temporary employees of overseas companies covered by other agreements are also not eligible.

Superannuation Employer Contributions

Employers are obligated to make SG contributions to their eligible employees’ super accounts, currently at a minimum rate of 9.5% of the employee’s wages, or ordinary time earnings. These are the wages that are earned for regular hours of work, including bonuses, commissions, allowances, over-award payments and some types of paid leave. These compulsory super payments are in addition to wages and salary, and do not affect the employees take-home pay. It is important to note that employers calculate SG payments with every pay period, however, they may only make contributions to your super fund once per quarter. It’s important to know your employers schedule, particularly if you are also making personal contributions to your super fund.

Businessman calculating super contributions

Superannuation Personal Contributions

Your employer’s contributions to your Super may not be enough to sustain the lifestyle you currently have, or the one you wish to have during your retirement. To fully prepare for retirement, consider making additional personal contributions to your super fund. If you are able to, put some extra money aside each month from your take-home pay.  By contributing a little extra to super, you can make a big difference to your super balance when you retire. Also known as non-concessional contributions, you can make personal contributions up to $100,000 per year (for the 2017/2018 year), and you may be able to claim a full tax deduction for contributions you make until you turn 75. If you are under 65, you are able to bring forward an extra two years’ worth of contributions, meaning you can put away up to $300,000 depending upon your Super’s balance.

Salary Sacrifice Contributions

You may decide to enter into an arrangement with your employer that allows you to forego part of your salary or wages in return for employer-provided benefits of a similar value. Salary sacrificed super contributions are not considered employee contributions, rather, they are counted as employer super contributions.  To make the most of your arrangement, you should consider agreeing with your employer for your voluntary contribution to be in addition to your employer’s compulsory super contribution. Super contributions made through salary sacrifice agreements are taxed in the super fund at a maximum rate of 15%, which is generally less than your marginal tax rate.

Government Contribution Eligibility

To help boost your retirement savings, the Government may also add to your super through the super co-contribution and low-income super tax offset incentives.  If you are eligible and have made a personal contribution to your super fund during the year, the Government will also make a contribution (called a co-contribution) up to a maximum amount of $500. Retired people that no longer have an eligible super account that accepts the co-contribution can receive a direct payout,   If you earn $37,000 or less a year (for the 2017/2018 year), you may be eligible for the low-income super tax offset – up to $500 paid directly into your super account to cover the tax paid on your concessional contributions. This means that most low-income earners will pay no tax on their concessional contributions.Small piggy bank standing in front of three arrows showing choice of super funds

Super Fund Choices

In most cases, employees are able to choose which super fund their employers make contributions to. There are five basic types of super funds available. These include industry funds that are either open to everyone, or that require employment within a certain industry, as long as your employer signs up with the fund. Retail funds are overseen by financial institutions but are open to all. Public sector funds are usually open to government employees of the Commonwealth, state, or territory. Corporate funds are typically only open to those who work for a specific company. And, finally, there are self-managed super funds that are managed by the individual. Keep in mind that if you do not make the choice yourself, your employer will make the decision for you.

However, you can change at any time by providing your employer with the details of the super fund that you prefer.

Superannuation Allocated Pensions

Allocated pensions are basically a regular stream of retirement income that is paid to you by your super fund. It is a way for retired individuals to receive wages again, but through the super account, not an employer. It is considered a private account-based pension and it also works in conjunction with any Government age pension that you receive. It’s important to note, however, that the higher your income, the lower your pension amount will be. Downsizing can also impact on pension entitlements. Beyond the obvious benefit of receiving a regular income, allocated pensions also allow the remaining balance of your super to continue to grow. As with the options available during your work years, super funds allow you to make the choice about how your money is invested. 

Superannuation taxesTax on Super Contributions

The amount of tax that you are required to pay on your super contributions depends on a number of factors, including how the contributions are made and how much is contributed each year. Before-tax, or concessional, contributions, such as compulsory employer contributions and salary sacrifice payments, are taxed at 15%. No tax is paid on after-tax, or non-concessional, contributions, which include contributions you make from your after-tax income, contributions made by your spouse to your super fund, and other personal contributions that are not used as an income tax deduction.

There are limits on the amount of before-tax and after-tax contributions you make each year, and these may vary depending on the financial year and your age.  If you contribute too much to your super, you may have to pay extra tax. If you exceed the concessional contributions cap, the excess is included in your income tax return and taxed at your marginal tax rate.  It is possible to withdraw some of your excess contributions in order to pay the extra tax. Likewise, if you’ve exceeded the non-concessional contributions cap, you may withdraw those excess contributions and any earnings, however, you will be taxed on the earnings at your marginal tax rate. Should you decide to keep your earnings in the fund, you will be taxed on the excess at a rate of 47%.

Tax on Super Benefits

The tax on super benefits depends on your age, the source of the benefit and how the benefit is paid.   Contributions that you made with your after-tax income do not incur any taxes when they are withdrawn from your super account, unless you have previously claimed a tax deduction for them. Conversely, contributions that are using before-tax income are taxable when withdrawn. Most super funds contain a combination of tax-free and taxable funds, and taxes are calculated based on the total of the taxable and non-taxable components that make up the balance of your super account. Withdrawal tax rates are also dependent upon your age at the time you make the withdrawal, and your preservation age. The way in which you receive your payment, whether it’s a lump sum or an income stream payment, will also affect your tax rate.  Generally, if you are over 60 years, super benefits are tax-free.

Retirement is supposed to be about enjoying life without the worries and headaches of working. It’s meant to be a time of rest, relaxation and spending time doing the things you love. Understanding how Superannuation works will help you get the most out of your retirement savings, and ensure that you’ll remain financially viable well into the future.

If you have questions about super that haven’t been answered here, or you’re a small business owner who needs help with paying super for your employees, please contact us at Nationwide Super – we’re here to help.