Provided by Mercer: 4/3/09
Nearly one in five (18%) people are unsure of the tax effectiveness of superannuation. Find out the facts about the tax treatment of superannuation.
This finding was made by Mercer which this week released the Superannuation Sentiment Index Study, a survey of 1,000 working Australians about their attitudes to superannuation.
The impact of market volatility
Recent market volatility and its impact on superannuation balances is an obvious reason for this (the number of people very/extremely worried about the negative impact of sharemarket volatility on their superannuation increased significantly from 11% to 21%). However, there’s another factor at play – the continued existence of gaps in understanding important aspects of superannuation, such as its tax effectiveness.
Nearly one in five (18%) people surveyed was unsure of the tax effectiveness of superannuation. Of those who had a view, the number rating superannuation as a tax effective way to save for retirement fell from 34% in June to 27% in December 2008.
How super is taxed
So let’s look at some facts about the tax treatment of superannuation – first, however, it’s important to remember that superannuation isn’t an investment but a vehicle for investing. Just as you can choose to invest your after-tax income in a variety of asset classes – such as cash, property and shares (or a combination) – you also have those choices with your superannuation savings.
However, the tax treatment of your superannuation is different to your personal savings. When you invest personally you pay tax on your earnings and capital gains at your personal marginal tax rate. Your personal tax rate can be anything between 0% and 45% depending on how much you earn.
Salary sacrifice and super
Alternatively, you can save for your retirement by salary sacrificing into superannuation (to supplement compulsory employer contributions). The main advantage of salary sacrifice is that you divert your income – which would otherwise have been taxed at your personal marginal tax rate – to a superannuation fund which is subject to a lower tax rate. Contributions to superannuation (both compulsory employer and any salary sacrifice contributions) are taxed at a maximum of 15 per cent.
It should be noted that salary sacrificing isn’t tax effective for everyone – for instance, an individual earning less than $6000pa will probably not benefit from salary sacrifice as their personal tax rate is 0% but if they chose to salary sacrifice to superannuation, 15% tax would be deducted from their contribution (thus they would be paying more tax by putting the money into super as a salary sacrifice contribution).
Case Study
However, for those on higher incomes, superannuation may be a tax-effective way to save. To illustrate, Jan is 45 years old and earning $100,000 per annum. In addition to her employer’s compulsory contributions, she chooses to salary sacrifice $10,000 to her superannuation fund. As the superannuation contribution is taxed at 15 per cent, Jan effectively contributes $8,500 to her superannuation.
However if she had decided to take the $10,000 as salary and invested using her post-tax salary, she would have paid tax at her personal marginal tax rate of 41.5 per cent (assuming she has no other income or deductions) and would have only been left with $5,850 to invest – a difference of $,2650.
In this example Jan has been able to invest $2,650 more for her retirement – if she does this for a number of years (taking into consideration that the earnings on her super is also taxed at a maximum rate of 15% and not her personal marginal tax rate) this should significantly improve the amount of her retirement savings. Jan understands that her superannuation savings cannot be accessed until she is over her “preservation age” and retired.
Where to next?
To help your superannuation to perform as you expect, take the time to look at where your super is invested and consider salary sacrificing.
As always, we recommend that you speak to a licensed or appropriately authorised financial adviser to check whether your superannuation is invested in a way that matches your risk profile and your objectives before making any decisions concerning your super. Your adviser will also let you know the pros and cons of salary sacrificing (including details of the caps that apply to superannuation contributions).
More information
To speak to a Mercer financial adviser about your super strategy, call us on
1800 633 403.
Download Mercer's 2009 Superannuation Sentiment Index Study
Visit out Super Sentiment dedicated page
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
