Superannuation: Revisiting the basics

Over the course of the last three decades there has been continual change regarding the rules governing superannuation.

In recent times, some of the most significant changes have come from the proposed measures released in the 2016 Federal Budget, many of which took effect on 1 July 2017.

For example:

1. The reduction in the concessional and non-concessional contribution cap limits.

2. The introduction of,

  • the ‘total superannuation balance’, which places additional eligibility requirements on individuals regarding, for example, the unused concessional contributions cap carry-forward provision, the non-concessional contributions cap and bring-forward rule, the Government Co-Contribution and the Spouse Contributions Tax Offset, and
  • the ‘transfer balance cap’, which places a limit on the amount of superannuation that can be transferred from accumulation phase to pension phase.

Given the continual changes, it can be easy to see why some wealth accumulators and retirees have become frustrated with superannuation; this may be especially true for those with a money personality that favours a preference for structure and order when it comes to dealing with money.

Despite these changes, it’s important to remember the key benefits that continue to make it such a powerful investment structure.

 

Tax treatment 
When it comes to building and maintaining wealth, superannuation is widely considered to be one of the most tax effective investment structures available. This is particularly evident when considering the tax treatment of income and capital gains from assets held inside superannuation.

Below is a brief overview of the tax treatment of income and capital gains whilst in accumulation and pension phase.

Accumulation phase accounts and Transition phase pensions
In the accumulation and transition phase, investment income within your account is generally subject to a maximum of 15% tax. Whereas, capital gains on assets held for longer than 12 months receive a 1/3 tax discount, which reduces the effective tax rate to 10%.

Retirement phase pensions 
In the retirement phase, investment income and capital gains within your account are exempt from taxation, subject to the transfer balance cap.

Pension income
If you are aged 60 or over, any income payments from your Retirement or Transition phase account based pension will be tax-free to you. Withdrawals from age 60 (available if you have satisfied a condition of release), can also be paid to you tax-free.

For further information regarding the tax treatment of income and capital gains from assets when held by other structures (e.g. individuals, trusts and companies), please see the relevant sections in our Tax and Structures module.

 

Contributions
Concessional and non-concessional contributions
Despite the decreases in the concessional and non-concessional contribution cap limits (and the added restrictions imposed by the introduction of the total superannuation balance), with careful and appropriate planning these new conditions can still be leveraged to your benefit when it comes to accumulating wealth for retirement.

As it stands, for the 2017/18 financial year:

  • The concessional contributions cap limit is $25,000 per annum. Furthermore, the carry-forward provision for unused concessional contributions will commence from 1 July 2018; and, subject to meeting the relevant eligibility requirements (e.g. a total superannuation balance less than $500,000), the 2019/20 financial year will be the first year that carried forward amounts will be able to be used.
  • The non-concessional contributions cap limit is $100,000 per annum and the three-year bring-forward rule still applies; however, it’s important to note that there are now additional eligibility requirements regarding your capacity to make non-concessional contributions. For example, if you have a total superannuation balance equal to or over $1.6 million at the end of 30 June in the previous financial year, you are no longer able to make further non-concessional contributions, and a 30 June total superannuation balance of at least $1.4 million will reduce the amount of non-concessional contributions you can bring forward. Furthermore, there are also transitional arrangements in place if you triggered the bring-forward rule in the 2015/16 or 2016/17 financial year.

 

Superannuation Guarantee 
For most employees, their employer is required to contribute 9.5% of their gross salary each year as a mandatory Super Guarantee contribution (this is gradually increasing up to 12% from 2021/22 to 2025/26). These contributions count towards your concessional contribution cap limit. Depending on your personal circumstances, the benefits of the Superannuation Guarantee in building wealth for retirement can be considerable when you look at the long-term impact of these contributions on your superannuation account balance. Let’s look at a simplified example.

David is 30 years old, works as an employee, earns $60,000 per annum (indexed to inflation – assumed to be 3%), and has a current superannuation account balance of $30,000 with underlying investments that generate assumed net returns of 6% per annum. His employer contributes the mandatory Super Guarantee (SG) contribution into his superannuation account, however David doesn’t make any additional contributions. When measuring in today’s dollars, factoring in the SG contributions and the abovementioned investment returns, David’s superannuation account balance may be expected to grow over time to $355,986 (age 60) and $443,426 (age 65).

 

Salary Sacrifice or Personal Deductible Contribution
Another benefit of superannuation is your ability to make additional concessional contributions via salary sacrifice arrangements and/or personal deductible contributions, subject to meeting the relevant eligibility requirements. This can be great for not only building wealth for retirement but also, depending on your personal circumstances, may increase your take home pay. Let’s look at a simplified example.

Jillian is 40 years old, works as an employee and earns $90,000 per annum. She is currently contributing $2,400 per annum to superannuation via non-concessional contributions (after tax); however, she is considering the option of salary sacrificing instead.