MISSING THE SUPER BOAT
I read that an advantage of superannuation is that it is taxed at 15 per cent instead of at your marginal tax rate. Is this painting a misleadingly rosy picture of this advantage? Is the 15 per cent rate applied to all of the pay-out from superannuation? With non-superannuation pay-outs, the marginal rate applies to only a fraction of the income. The average tax rate for recipients is below the marginal rate, in some extreme circumstances so far below that the average rate could be less than the superannuation overall 15 per cent or am
I missing something? W.A.
Yes, youre missing a lot. Super does provide helpful tax benefits on the way in also tax benefits that are marginally helpful for low-income earners while the money is in the fund and then very helpful tax benefits on the way out.
In a nutshell, salary-sacrificed contributions are taxed at 15 per cent on entry, along with the employers 9 per cent compulsory contribution, plus any personal contributions from self-employed people. All are lumped together as concessional contributions. Since personal tax begins at 19 per cent, plus 1.5 per cent Medicare for anyone earning more than $18,200, most workers are on marginal tax rates higher than the 15 per cent contributions tax and can save on income tax through concessional contributions. People can also benefit by investing non-concessional contributions, which are not taxed on entry but provide no tax deductions.
Money earned in an accumulating super fund is taxed at 15 per cent, reduced by franking credits, expenses, and so forth. That means that funds holding shares paying franked dividends tend to pay a much lower amount of tax. One could supposedly argue against super on the grounds that, while a super fund is nominally taxed at 15 per cent on annual income, individuals dont pay 15 per cent tax on average until they earn more than $40,000 a year. However, at this level, they are in the 32.5 per cent tax bracket, plus Medicare. And so we go back to the first point, and that super provides a tax shelter during ones working life.
The real savings come in retirement, when over-60s are not taxed on super withdrawals, dont have to include super withdrawals in tax returns, and super pensions are not taxed on their income.