YOUR QUESTIONS

MISSING THE SUPER BOAT

By InvestSMART · 23 Dec 2012

By InvestSMART ·
23 Dec 2012

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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.

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Frequently Asked Questions about this Article…

What does the 15 per cent superannuation tax actually mean for everyday investors?

The 15 per cent rate refers to how concessional contributions and earnings inside an accumulating super fund are taxed while the money is in the fund. Concessional (before‑tax) contributions are taxed at 15% on entry, and investment earnings while in accumulation are generally taxed at 15% (subject to reductions such as franking credits and allowable expenses).

Does the 15% tax rate apply to all superannuation payouts and withdrawals?

No. The 15% rate applies to certain contributions and to earnings inside an accumulating fund, but it does not automatically apply to payouts. In retirement the rules are much more generous — for example, over‑60s generally aren’t taxed on super withdrawals and super pensions are not taxed on their income.

What are concessional and non‑concessional super contributions and how are they taxed?

Concessional contributions (salary‑sacrifice, employer compulsory contributions such as the 9% super guarantee, and some personal contributions for the self‑employed) are taxed at 15% on entry. Non‑concessional contributions are made from after‑tax money, are not taxed on entry to the fund, but they do not attract a tax deduction.

How does salary sacrifice into super save me income tax?

Salary‑sacrificed (concessional) contributions are taxed at 15% when they enter super rather than your marginal income tax rate. Because personal income tax starts at about 19% (plus the 1.5% Medicare levy for many earners), many workers can reduce their immediate income tax bill by using concessional contributions.

How are investment earnings inside a super fund taxed and what role do franking credits play?

Investment earnings in an accumulating super fund are generally taxed at 15%, but that tax can be reduced by franking credits, deductible expenses and other offsets. Funds that hold shares paying franked dividends often face a much lower effective tax rate because franking credits offset tax on those dividends.

Do low‑income earners get the same super tax advantages as high earners?

Super provides tax benefits to both low‑ and higher‑income earners, but the size of the benefit differs. The entry‑tax structure and concessional rates can be marginally helpful for low‑income workers while funds are accumulating, and super becomes particularly tax‑advantageous in retirement when withdrawals and pension income can be tax‑free for over‑60s.

Why do people say superannuation acts as a tax shelter during working life?

Because contributions and earnings inside super are typically taxed at 15%, which is lower than many people’s marginal tax rates while working, super effectively shelters some earnings from higher personal income tax — giving a tax advantage during accumulation.

When do the biggest tax savings from superannuation usually occur?

The biggest savings often come in retirement. For example, once you’re over 60 many super withdrawals are tax‑free, super isn’t included in a tax return in the same way, and super pensions are not taxed on their income — making retirement the most tax‑advantageous phase for super.