Building your super
Building up super from your own money is generally an excellent investment, thanks to tax concessions and other government benefits. Getting started well before you retire is likely to be far better than a last minute rush a few years before retirement.
Check you can spare the money
After you put it into super it must stay there until you retire. Weigh up the benefits of extra super against your other priorities, for example:
- paying off your credit cards or other debt such as a home loan
- saving up for a home, starting a family or education
- building up other investments to draw on whenever it suits you.
Your own after-tax contributions
(also called 'non-concessional' contributions)
If you can spare the money, contributing from your after-tax income can really boost your savings.
Your super fund gets tax concessions on investment earnings, so you will usually save more by investing through super than by investing in the same assets outside super. Contributions from your after-tax income don't get taxed when your fund receives them.
Some employers encourage extra contributions by putting in extra money if you do. You will have to pay tax at the highest marginal tax rate plus the Medicare levy on excessive contributions so you need to know the maximum tax-free amount you can contribute.
The limit is $150,000 each year, or if you are under age 65 you can contribute up to $450,000 over three years. (This information is current until 1 July 2010 because the concessional cap changes with indexation annually and the non-concessional limit is set at three times the concessional contributions cap.)
See the ATO's information Super contributions - too much super can mean extra tax for more about super contributions.
Between ages 65 and 74 you can generally contribute to super whenever you like, so long as you meet the 'gainful employment' test. You will meet the test if you have worked for at least 40 hours within a period of 30 consecutive days during the particular financial year. Gainful employment does not include unpaid work. If your current fund doesn't allow you to contribute your own money, you can simply join another fund for that purpose. Contributions aren't generally allowed after you reach age 75.
Co-contributions
If you make after-tax contributions and earn an income as an employee, you may also receive a government co-contribution based on your income and how much you contribute. Self-employed people are also eligible, subject to certain conditions.
If you're eligible, the ATO pays the co-contribution automatically into your fund, based on your tax return and information received from your fund.
If your total income is $30,342
or less, the maximum co-contribution is $1,000, based on $1 from the government for every $1 you contribute.
Co-contributions reduce as your income increases, phasing out completely for total incomes of $60,342 or more. Income level thresholds are indexed annually so these figures are current until 1 July 2010.
You can check how much co-contribution you could receive by using the co-contribution calculators on the the Australian Tax Office website.
Concessional contributions or 'salary sacrificing'
Higher income earners can benefit if your employer allows extra contributions from your pre-tax income, or 'salary sacrifice'. (If you're eligible to receive a government co-contribution, you may be better off making after-tax contributions.)
Suppose you earn $70,000 before tax and want to top up super. You 'sacrifice' $10,000 in salary, getting a 'new' salary of $60,000 on which there's less tax because there's less income. Your sacrificed $10,000 goes into your super with only 15% in contributions tax taken out. As a result, you've invested more money than by taking the same $10,000 in normal pay, paying normal tax and then investing what was left.
Negotiate these arrangements carefully with your employer. Make sure salary sacrificing won't reduce what your employer would otherwise contribute. Legally, salary-sacrifice contributions are 'employer contributions' which your employer may be entitled to count as part of the 'super guarantee' compulsory 9% contribution. Unless you agree otherwise, your employer may be entitled to:
- reduce their usual contribution by the total amount you salary sacrifice or
- pay a lower contribution based on your new 'reduced' salary.
You will have to pay tax at the highest marginal tax rate plus the Medicare levy on excessive contributions so you need to know your concessional contributions cap. Generally your concessional contributions cap is $25,000 (indexed annually so these figures are current until 1 July 2010).
If you're aged over 50 your concessional contributions cap is $50,000 up until 30 June 2012. For example, if you turn 50 on 1 January 2010, you will be able to make $50,000 of pre-tax contributions in the 2010-2011 and 2011-12 financial years.
See the ATO's information Super contributions - too much super can mean extra tax for more about super contributions.
Contributing for your spouse
You can claim a tax offset of up to $3,000, on super you pay on behalf of your spouse if they have a low or nil income. A 'spouse' includes another person who, although not legally married to you, lives with you on a bona fide domestic basis as your husband or wife, but does not include a person who lives separately and apart from you on a permanent basis. The Australian Taxation Office can tell you more.
FIDO Website: Printed 07/31/2010
