Superannuation

– the future savings vehicle for Australians

The Australian private retirement savings system, or superannuation as it is known, has undergone a major overhaul, offering significantly increased tax benefits to the public. Most of these changes commenced on 1 July 2007. Consequently it has been promoted by the previous Government as the single most effective way to save for retirement. In the previous Australian Treasurer’s own words, “you won’t find a better savings vehicle.”

What is Superannuation – the Basics

Superannuation is a type of investment fund that receives tax concessions from the Australian Government, providing it meets certain regulated requirements. One of the major requirements is that once the money is invested on behalf of someone, they generally cannot withdraw it until permanently retiring at age 55 or reaching age 65. Depending on the particular superannuation fund chosen, investments within the trust may include (but are not limited to) cash, bonds, direct equities, property, or managed funds.

Compulsory superannuation, or ‘Superannuation Guarantee’ (SG) as it is officially termed, legally requires employers to make a contribution of 9% of an employee’s earnings into a superannuation fund or retirement savings account. From 1 July 2005, Super Choice was introduced to give the majority of Australian resident employees the right to decide on which superannuation fund their employer should deposit their SG contributions.

Employees can also make voluntary contributions. These are made after income tax has been deducted, although some employers allow staff to salary sacrifice, whereby you negotiate an agreed part of your pre-tax salary into your superannuation fund.

Apart from superannuation there is also the Government funded age pension. However the age pension is only available to people with low levels of income and assets.

How Superannuation is taxed

One of the key benefits of superannuation is that it is concessionally taxed compared to taxation of savings outside the superannuation system. Pre-tax contributions such as SG and salary sacrifice, and the investment earnings on those contributions are currently taxed at a maximum of 15%. After-tax contributions and, from 1 July 2007, superannuation benefits taken from age 60 are not taxed.

This compares with investment earnings outside the superannuation system currently taxed at up to 46.5% (the highest marginal rate plus Medicare Levy of 1.5%).

Super for the Self-employed

Superannuation contributions made by the self-employed are dealt with in the same way for taxation purposes as contributions made by employers on behalf of employees.

As of 1 July 2007, those self-employed under the age of 75 are eligible for a full deduction on superannuation contributions. An annual cap of $50,000 applies for people under age 50. For those aged 50 and over a higher cap of $100,000 applies until 30 June 2012. Although these people are entitled to a tax deduction on any amount contributed to super, if these caps are exceeded their contributions will be taxed at 46.5% (i.e. an extra 31.5% on the existing 15% that applies to all deductible contributions).

Entering and Leaving Australia

When entering Australia, to avoid incurring Australian tax on an overseas pension transferred to Australia, any funds will need to be transferred within the first six months of becoming an Australian “tax resident.” If transferred after this period Australian tax may apply. On the other hand, when leaving the country, Australian superannuation funds are only allowed to be transferred into other Australian superannuation funds. So, as a general rule, unless you are in Australia on an eligible temporary visa, your superannuation may have to stay in Australia until you retire after age 55, or reach 65.

Organisations and people like Commonwealth Financial Planners are available to provide further guidance based on an individual assessment.

Information Supplied by:

Commonwealth Financial Planning

Phone: 1800 241 996 (within Australia)

Phone: +61 2 9378 5000 (from Overseas)

Website: www.commbank.com.au/movingtoaustralia