Q: Great site! Lots of excellent information. I now work part-time, earning just under $37,000, and wondered whether I should bother with super. I am pretty sure I will get the Age Pension, and based on my income I reckon I would be better to save outside super and pay less tax, rather than have my earnings taxed in the super fund. What do you think?
A: Many thanks for your kind feedback about our website. The question you ask is a popular one. A few issues need to be considered when answering this question, which we outline below.
A short answer to your question however, is: if you pay less tax in percentage terms on your wages and salary (and other income) than the 15% earnings tax payable by your super fund on investment earnings and on concessional contributions, then making super contributions and having a super account may not be a tax-effective option. Note that if you are an employee, your employer must make super contributions on your behalf, regardless of your marginal tax rate.
Background: From July 2012, the former ALP federal government introduced tax cuts to offset the increase in the cost of living expected from the imposition of the carbon tax on Australia’s biggest polluting companies. Although the Liberal government repealed the carbon tax, they retained the tax cuts. The tax cuts mean a higher tax-free threshold (than previously) of $18,200, and higher marginal tax rates for incomes above $18,200 and below $80,000. What this means is that for those earning more than $20,542 (for the 2018/2019 year, or for the 2019/2020 year), they will be paying at least 19% income tax, compared to 15% tax on super fund investment earnings and 15% tax on super investment earnings, which means making super contributions has become more tax-effective for more Australians, assuming you a have a taxable income where you are likely to pay 19% of each dollar in income tax (for more information on income tax rates, see SuperGuide article Income tax: Australian tax brackets and rates (2018/2019 and previous years)).
Further, since July 2012, the former ALP government introduced the Low Income Super Contribution, which is a refund of the 15% contributions tax (up to $500) for those earning less than $37,000. The current Liberal government extended this tax refund beyond the end-date of June 2017, and from 1 July 2017, it was renamed the Low Income Superannuation Tax Offset. For more information on LISTO, see SuperGuide article Superannuation tax refund: 10 things to know about LISTO.
Note: Super fund earnings will still be subject to 15% tax, which means anyone paying less than 15% tax on personal income has to decide if making super contributions is a tax-effective strategy.
Important: SuperGuide is an information website, not an advisory website. The information set out below may assist you in understanding how the super system interacts with the personal income tax system.
Making super contributions
You can make two types of super contributions, known as concessional contributions and non-concessional contributions.
Concessional contributions: Concessional contributions are before-tax super contributions and favoured by those Australians who pay more than 15 cents in the dollar tax. Even so, the compulsory employer super contributions (Superannuation Guarantee) that your employer must pay into a super fund at least quarterly are also considered concessional contributions, regardless of the income level of the employee.
Concessional contributions are subject to 15% contributions tax upon entry into the super fund (and fund members with an adjusted taxable income of more than $250,000 are hit with an additional 15% tax on those contributions when they lodge their income tax returns).
Note: If you earn less than $37,000 for the financial year, that is, your adjusted taxable income is less than $37,000, then the 15% contributions tax deducted from your concessional contributions will be refunded to your super fund as a Low Income Superannuation Tax Offset (LISTO), up to a maximum of $500. For more information on LISTO, see SuperGuide article Superannuation tax refund: 10 things to know about LISTO.
Non-concessional contributions: If you make non-concessional (after-tax) contributions, then the full super contribution reaches your super account without contributions tax being deducted, but any earnings derived from the investments sourced from that super contribution are subject to 15% earnings tax. If an individual pays less than 15% tax on personal income, he or she then has to decide whether paying 15% on fund earnings is worthwhile, when they pay less in tax outside the super system. Even those who pay more than 15 cents in the dollar income tax (that is, anyone with a taxable income of more than $37,000), have to decide if locking your money away is worth the tax concession.
Tip: The one important exception when assessing whether non-concessional contributions are worthwhile tax-wise is: if you are eligible to take advantage of the government’s co-contribution scheme. (For the 2018/2019 year, and for the 2017/2018 and 2016/2017 years, as occurred for the 2015/2016 year, the federal government places up to $500 of tax-free super money into your super fund when you make up to a $1,000 after-tax contribution.) For more information on co-contributions, see the SuperGuide article Gaining from the government: How you can score a co-contribution freebie.
How the super and tax rules work together
The following points are a potted summary of the super tax rules, and related income tax rules:
- If your taxable income is less than $20,542, your marginal tax rate is 0%, which is less than the tax rate on super fund earnings (15%).
- If you earn more than $20,542 but less than $37,000, your marginal tax rate is 19%, which is more than the 15% tax rate on fund earnings, although a special tax offset in place for 4 years (LAMITO) may mean you can earn slightly more income than $20,542 and still not pay tax.
- If your taxable income is greater than $20,542 (or slightly higher if LAMITO is applicable), and you choose to make before-tax contributions (concessional contributions), then the income tax you’re saving of 19 cents in the dollar, is 4 cents higher in the dollar than the 15% contributions tax deducted from the super contributions.
- If you’re in retirement phase with your super and over 60, you receive tax-free income from your super pension, and earnings on your fund assets are exempt from tax.
- In retirement, depending on your level of income, you may receive similar tax benefits outside the super system. If you’re Age Pension age (at least age 65.5 years and from 1 January 2019, 66 years), you may be able to access more generous tax-free thresholds, known as the Seniors and Pensioners Tax Offset (SAPTO), for your non-super income.
As a next step, the following SuperGuide articles may be helpful: