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Super is still tax effective

Despite recent Federal Budget changes, super remains a very tax-effective investment, explains Paul Farrugia.

Superannuation is really just an environment for you to accumulate money and from a tax perspective it is one of the best places you can find.

Super is a tax effective structure because:

  • money you contribute before tax (Superannuation Guarantee, salary sacrifice and personal tax-deductible contributions) are generally taxed at 15 per cent, which is lower than most people’s marginal tax rates (though high-income earners may pay an additional 15 per cent)
  • interest, investment income and capital gains inside super are also taxed at a maximum 15 per cent.

The trade-off for these tax perks is that your money is ‘preserved’ until retirement, so you can’t generally access it until you have reached your preservation age (55 to 60, depending on your date of birth).

What are the tax benefits?

Any benefit you can get for the 2016-17 financial year depends on the marginal tax rate you’re currently paying. The below table outlines pre-tax concessional contributions and potential benefit at different tax rates.

Marginal tax vs Super tax

Income $

Marginal tax rate#

Super tax rate

Tax rate difference

0 - 18,200

0%

15%

Extra 15%*

18,201 – 37,000

21%

15%

Save 6%*

37,001 – 87,000

34.5%

15%

Save 19.5%

87,001 – 180,000

39%

15%

Save 24%

180,001 – 249,999

47%^

15%

Save 32%

250,000+

47%^

30%

Save 17%

*The low income super tax offset contribution may reduce up to $500 of the contributions tax.

#Includes 2% Medicare levy.

How it has changed

The rules governing superannuation have changed significantly from 1 July 2017, making it more limited as an investment vehicle but not necessarily less tax effective.

From 1 July 2017:

  • Only up to $1.6 million of super savings can be moved into the tax-free retirement income phase.
  • Pre-tax contributions are capped at $25,000 a year.
  • Most people can make personal tax-deductible super contributions. Conditions apply, hence tax advice is essential.  
  • Contributions from after-tax savings are limited to $100,000 per year and may be made if your total super balance is less than $1.6 million. If you are under age 65 you may be able to make up to $300,000 in a single financial year, depending on your total super balance.
  • For those with super balances of less than $500,000, five years’ value of unused concessional contributions can be deposited at once (starting 1 July 2018).

Four steps to make the most of super

Here are some strategies that could help you make the most of potential savings.

1. Consider salary-sacrifice or personal tax-deductible contributions[1]

If you ask your employer to put some of your salary into super, before it goes into your pay packet, this amount will be taxed at 15 per cent (if you earn less than $250,000) instead of your marginal tax rate. From 1 July 2017, the concessional contributions cap has reduced to $25,000.

2. Consider moving some savings into super

If you have a large amount of cash or other investments outside super that you won’t need to access any time soon, you may consider moving them into super. That way the interest or investment earnings (including any capital gains) would be taxed favourably inside super. Just be aware of capital gains tax if you’re selling any investments to do this and also remember there are limits on the amount you can contribute to super.

3. Consider your life insurance

You can use super to help you take a higher level of life insurance cover than you may be able to afford outside super. That’s because you can use before-tax income to pay for insurance (e.g. through your pre-tax super contributions), rather than having to pay for it using your regular savings (after tax).

4. Consider a pension account

If you’re over your preservation age and retired, you could start drawing an income by turning your super into a pension account. (From 1 July 2017 the maximum amount you can transfer into the ‘retirement’ phase is $1.6 million.)

Take charge of your independence

For ANZ Smart Choice Super customers, making additional contributions is as easy as a simple BPay payment.

Biller Code - 169060

Reference Code - Member Number - This is the combination of your ANZ Smart Choice Super BSB and account number.