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What is Superannuation: Contributions, Access, and Taxes

Daniel Brown

Financial ExpertUpdated on August 2, 2022

i Disclosure statement

Are you Interested in superannuation but unsure how it works? It’s normal to feel overwhelmed by your circumstances and future retirement goals. 

Jump straight to…

This article will help you understand how Australian super works, including how contributions are paid and withdrawn. It will also explain the effects of superannuation on income tax and age pensions and the difference between superannuation and retirement.

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Superannuation: Contributions, Access, and Taxes

Superannuation is a pension program designed by a company to provide for their employees’ retirement benefits. The money deposited into a super account grows, usually without tax implications, until you retire or choose to withdraw it. 

There are many types of superannuation funds available. Most Australians use industry funds or retail funds. 

SMSF (self-managed superannuation fund) is another investment strategy and highly preferred over most traditional investment options.

You can also do a superannuation rollover by transferring your existing super between funds. 

For more tips on choosing a super fund and other investment options, visit moneysmart.gov.au

Contributions

Employers pay their employees’ superannuation into a super account of the employee’s choice. 

Employees are eligible for superannuation contributions if they meet any of these conditions. 

  • At least 18 years with a $450 salary or higher
  • Below 18 years with a $450 salary or higher and renders work for over 30 hours a week. 

The guideline for eligibility applies to employees working either casual, part-time or full time. They also apply to temporary residents. 

If you’re a contractor for a small business, are paid for labour and have an Australian Business Number (ABN), you’re qualified for Australian superannuation.

Your first job comes with your first pay and first superannuation. However, you can forego part of your salary for employer-provided benefits of the same value. This arrangement is called salary sacrifice super funds. 

You can also add to your super savings with your own money. Even when you change jobs, you can choose your own super fund if you are still eligible for your new job.

The Australian government may add to the MySuper fund to boost retirement savings through co-contribution and low-income tax incentives. 

Employees are eligible to receive a $500 contribution from the government, as well as lower fees or super contributions. 

Access

Super money, or the accumulated contributions in the superannuation account given by the employer and the employee, can be accessed during retirement. 

Withdrawing the savings from available financial services of a provider at an earlier time is allowed under certain circumstances, such as experiencing financial hardship or poor health.

Guidelines on keeping track of your super fund and super balance (used as a transition to retirement pension) are made available by the provider or through educational webinars before applying for the plan. 

Generally, an eligible employee who applies for income protection through a superannuation guarantee receives a fixed amount once the preservation age is reached. 

The amount depends on the preexisting formula that considers salary rate and age. 

Specific conditions may also allow an early release, giving you access to some of your super in advance.

Taxes

Depending on the modes of contributions and total savings for each year, superannuation funds are subject to tax. In addition,15% tax is imposed on compulsory employer contributions and salary sacrifice payments. 

Contributions made from the after-tax income and those not taken as an income tax deduction are tax-free. 

Funds with an after-tax income stream do not incur taxes when withdrawn from the super account unless there is a claim for a tax deduction. Contributions that follow a before-tax income scheme have corresponding tax rates when they are withdrawn. 

A good piece of financial advice is that taxation on super funds and retirement income is subject to certain conditions. 

When the amount falls under a taxable component based on the reports given by the superannuation provider, it is reflected on the annual income tax return of the financial year. 

Also, access to superannuation can affect age pension entitlements. The remaining account balance from the product disclosure statement will be taken into account when determining the age pension amount. 

A lump-sum withdrawal can affect superannuation payments and tax implications. 

Meanwhile, life and permanent disability insurance cover is an option for those affected by coronavirus through superannuation funds in Australia. 

Under the Superannuation Industry Act of 1993, all members must have death and permanent incapacity benefits offered through their super account, subject to some exceptions.

Superannuation is not the same as retirement; however, a superannuation account does work like a retirement savings account. 

One significant difference is that a retirement savings account is provided by a bank, credit union, or life insurance company. 

Laws and Regulating Bodies Over Superannuation 

There are state laws governing the operation of the superannuation system and investment performance in Australia. 

The following legislations are relevant to understanding the legal aspects of this pension plan: 

  • Superannuation Act 1976 
  • Superannuation (Resolution of Complaints) Act 1993 
  • Superannuation Industry (Supervision) Act 1993 
  • Superannuation Act 1990, which established the Public Sector Superannuation Scheme (PSS) 

There are key government agencies involved in the regulation of the superannuation system. These include: 

  • Australian Taxation Office (ATO), which manages contributions towards the FHSS (First Home Super Saver Scheme)
  • Australian Securities and Investments Commission (ASIC)
  • Australian Prudential Regulation Authority (APRA)
  • Department of Human Services (DHS)

Having a superannuation plan that is appropriate for your personal circumstances and investment options can guarantee success in terms of lump sum and pension payments, as well as other investment returns.

For more information, request a call from our expert financial adviser today! 

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The more we do to maximise and grow your super today, the more financial freedom you’ll have in years to come find out how a financial planner or adviser can help you with this and more

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References

  1. Australian Government, Australian Taxation Office, Your Superannuation Basics, retrieved from https://www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Your-superannuation-basics/ 
  2. Personal Contributions Guide – QSuper, retrieved from https://qsuper.qld.gov.au/calculators-and-forms/publications/
  3. Australian Government, Australian Taxation Office, Your Superannuation Basics, retrieved from https://www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Your-superannuation-basics/ 
  4. Investopedia, Superannuation, retrieved from https://www.investopedia.com/terms/s/superannuation.asp 
  5. Australian Government, Australian Taxation Office, How Tax Applies to Your Super, Retrieved from https://www.ato.gov.au/individuals/super/in-detail/withdrawing-and-using-your-super/withdrawing-your-super-and-paying-tax/?anchor=Howtaxappliestoyoursuper 
  6. QSuper, The Age Pension and Superannuation, retrieved from https://qsuper.qld.gov.au/retirement/planning-your-retirement/age-pension-and-super 
  7. APRA, Life Insurance in Superannuation: Improving Outcomes for Members, retrieved from https://www.apra.gov.au/life-insurance-superannuation-improving-outcomes-for-members#:~:text=Life%20and%20disability%20insurance%20are%20important%20benefits%20offered,their%20superannuation%20fund%20%28subject%20to%20certain%20limited%20exceptions%29
  8. Australian Government, Australian Law Reform Commission, Overview of Superannuation System, retrieved from https://www.alrc.gov.au/publication/family-violence-and-commonwealth-laws-improving-legal-frameworks-alrc-report-117/19-superannuation-law-2/overview-of-the-superannuation-system-2/
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