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An attempt to explain superannuation in ordinary language

Update 21 September: Since we first posted this article, the Federal Government has modified some of its proposed changes to the rules surrounding super contributions. There may well be further changes in the future. The following is the current situation as we understand it.

 

13 September 2016

Background to this explanation

Politicians are engaged in furious debate over what to do with superannuation. And there’s lots of discussion about what to do with ‘it’ because ‘it’ is perceived to be costing the Federal budget too much money.

We’ve commented before about the double standards. The powerful federal bureaucracy gives itself special advantages that it denies to ordinary Australians. The real reform that’s needed is to bring ALL public servants on to the same rules as everyone else! But pigs will probably fly first!!

However, for most Australians the superannuation rules are REALLY confusing, mainly because the language used is weird. In this article we attempt to give an explanation of some basic facts in ordinary language, including some of the changes currently being floated. Hopefully, we’ve got the facts correct! But be careful. We can’t be sure about what’s going to happen with the proposed changes as Parliament has yet to approve them.

Here we go!

Some very basic facts. (Without the complex language!)

The Australian government provides tax advantages to all Australians when they save money in superannuation. This is done to assist them to be as financially independent as possible when they retire. However, there are rules governing the superannuation tax system that are in place to limit the ‘lost’ tax revenue.

This article seeks to explains the major superannuation tax rules, how they are proposed to be changed (under the 2016 federal Budget), why and what this means to you.

Fact One: Your money goes into superannuation = lower tax (called ‘concessional’ contributions)
When your employer or you put money into superannuation (typically as an employer’s payment of the Super Guarantee Levy or a salary sacrifice) that money is taxed at 15% (from dollar one). This means you should pay less tax in comparison to what you would pay under normal income tax rules. For example, if your normal income tax rate is 37%, you only pay 15% on your superannuation contributions.

Current situation: Depending on your age, the annual limit on these low-taxed contributions is $30,000–$35,000.
Proposed change: From 1 July 2017, the annual limit is to be reduced to $25,000 (regardless of age).

In addition, any income you receive on investments (shares, term deposits, etc.) from the money in your superannuation is taxed at 15%.  Again this means you pay less tax in comparison to what you would normally pay under income tax rules. For instance, if your income tax rate is 37%, you only pay 15% on your superannuation investment income.

There is no limit on how much you can earn in your superannuation and still receive the full tax advantage.

Fact Two: You can put extra money into superannuation = no tax savings on contributions, but tax savings on investment income (called ‘non-concessional’ contributions)
You can also make additional personal contributions to your superannuation but you won’t receive any tax advantage on contributions. You don’t pay any additional tax on this extra money you put into superannuation.

If you do put in extra money, any income you receive on investments (shares, term deposits, etc.) from the money in your superannuation is taxed at 15%. Again, this means you pay less tax on investment income in comparison to what you would pay under income tax rules. So if your income tax rate is 37%, you only pay 15% on your superannuation investment income.

Current situation: The annual limit on how much extra you can put into super is $180,000.
Proposed change: From 1 July 2017, you will not be allowed to put more into super than $100,000 per annum.

Fact Three: How your superannuation money must be administered.
In order to obtain the tax advantages mentioned above, there are legal requirements on how your money is administered. Your money might be in a large superannuation fund (retail, industry or other) or you may have a Self Managed Super Fund. The requirements are broadly the same across all types of funds and mean that your superannuation fund must keep two accounts that are overseen by the Taxation Office: an ‘accumulation’ account and a ‘retirement’ account.

Accumulation account = 15% tax: When you are building your superannuation, your superannuation fund must keep all your money in an account called an ‘accumulation’ account. It’s called this because you are building/accumulating money in your superannuation.

When money is in your ‘accumulation’ account, you are not allowed to take out any of the money until you retire. (There are special rules about moving/transitioning to retirement.)

When you have retired you can still keep putting money into your accumulation account to a maximum of $25,000 per year (as outlined above) and be taxed at 15%. The income on your investments is also taxed at 15% as described above. Again this gives you tax advantages.

Retirement account = no tax: When you reach retirement age your superannuation fund sets up a new account called a ‘retirement’ account. Money is transferred from your accumulation account to your retirement account. When money is in your retirement account you do not pay any tax on any income you receive on your investments (shares, term deposits, etc.) in this account.

However, once you have retired, you must start taking money out of your retirement account.

There are requirements about how much and when you must/can take out money during your retirement.

Proposed change: From 1 July 2017, you cannot have more than $1.6 million in your retirement account. Amounts in excess of this will need to be moved to your accumulation account, or be withdrawn, or else you will be charged tax.

Moving into retirement (transition): If you have reached 60 but not yet fully retired (for example, you work part-time), you can set up a retirement account and take some money out. There are strict rules about how much and when you can take out money as you move/transition into retirement.  

Current situation: Money you take out from your retirement account is tax free.
Proposed change: From 1 July 2017, you will pay 15% tax on investment income.

When you have retired: When you have retired you can take money out of your accumulation account at any time with no limits. You do not pay any tax on any money you take out of either your accumulation or retirement account.

 



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