So, one of your mates mentioned that they put extra money into their super and pay less tax.
That sounds interesting, maybe something worth knowing about, you think.
You jump online to do some fact-checking, and BAM! You come across this very blog post, laying it all out clearly for you. How good.
How is super taxed?
Basically, there are three different points at which your superannuation can be taxed:
1. When it goes into the fund (contributions)
Contributions are usually made by your employer, but you can also opt to salary sacrifice extra contributions. These contributions are taken out of your pre-tax income, and they’re both taxed at 15% when your super fund receives them.
After-tax contributions are different from salary sacrifices because they come out of your after-tax salary. They’ve already been taxed once, so they’re not taxed again when they go into your super. However, it’s worth noting that in certain circumstances you can claim a tax deduction for these on your return. These contributions are capped at $100k per financial year (individuals with balances more than $1.6 million aren’t able to make after-tax contributions).
2. While it’s in the fund (investment earnings)
All that money in your super isn’t just sitting there. It’s being invested, and hopefully making you some extra money. That extra money is classified as an investment earning and is usually taxed at 15%, and capital gains somewhere between 10-15% depending on how long the asset has been held.
3. When it leaves the fund (benefits)
If you withdraw from your super after the age of 60, it’s tax-free. If you access your super before you’re 60, you will likely pay some tax, though it does depend on your exact circumstances. Read more about that here if you like.
So, you pay less tax if you contribute more super?
The short answer is yes, but there’s a “BUT” — there’s always a “but.”
I hear what you’re asking. If your voluntary contributions are only taxed at 15%, why not just contribute heaps, and save heaps on tax?
Basically, you’re capped at how much extra you can put into your super at the discounted tax rate. You can salary sacrifice up to $25,000 each financial year. Anything more than that will be subject to extra tax, and possibly other charges as well.
You have a pre-tax salary of $85,000, plus your employer pays you the 9.5% super on top. You decide you can spare $10,000 to contribute to your super this year.
This means you need to make $15,267 per year as a pre-tax contribution (salary sacrifice).
So, your total super contributions for this year will be: $8,075 (from your employer) + $15,267 pre-tax contribution.
Normally, without salary sacrificing, you’d be paying $20,872 in income tax (and Medicare levy).
But, with your voluntary contribution (of $15,267), it breaks down as follows:
Your contributions of $8,075 and $15,267 are taxed at 15% = $3,501. That means you've put a total of $19,841 into your super for the year.
Meanwhile, your pre-tax salary of $85,000 has been reduced by $15,267 (salary sacrifice). The remaining $69,733 is taxed at the normal rate, which means you pay income tax (and Medicare levy) of $15,605.
Your take-home pay is $54,128. If you hadn't salary sacrificed, your take-home pay would have been $64,128. So, the difference is the $10,000 you wanted to contribute to your super.
But the bonus is you've paid $5,267 less tax.
If you’ve found you’ve contributed too much pre-tax, you can withdraw up to 85% of the excess.
If you’ve contributed too much after-tax, you might be able to ‘bring it forward’ to the following year.
If you’ve got two minutes on your hands, you can check out this nifty super contributions optimiser.
And of course, if you’re confused or stuck, the best plan is to call up your super fund for some help.
This blog is provided for your information purposes and is not tax advice. Whilst we’ve taken care in the preparation of this information, it might not be accurate and may have subsequently changed. You should consider talking to a professional financial adviser or accountant before making a decision.