Money invested through super is locked away (preserved), so it's only an appropriate investment strategy if you're not likely to need it until retirement. It is, however, one of the most tax-effective ways to invest, as any earnings in super are taxed at only 15%, and, you can also use it to reduce your other tax liabilities.
There are several ways to make tax-effective super contributions, and there are benefits with each depending on your super balance, level of income and how close you are to retirement.
In some cases, using more than one method can be most appropriate.
Salary sacrificing out of your pre-tax income has become a particularly worthwhile way to contribute to super. If you're able to, it can be worthwhile to salary sacrifice as far as age-based limits allow.
Table 1: Super age-based contribution limits — for employees
|Age in years
for 2005–06 ($)
|Under age 35
|Age 35 to 49
|Age 50 and over
Pre-tax income you sacrifice into super is taxed at 15% instead of at your marginal rate. Sacrificing then reduces your assessable income so you pay less income tax, and may be able to lower your overall level of taxation.
For example, if your annual taxable income is $70,000 and you choose to sacrifice $20,000, the $20,000 you place in super is taxed at 15% ($3000 tax payable). As a result your marginal rate drops from 42% (plus the 1.5% Medicare levy) to 30%. Tax saved would be around $3840, but it also means that income from other investments outside super will be taxed at the lower 30% marginal rate (up to the $63,000 threshold when the higher 42% rate applies).
Table 2: Tax rates 2005–2006
||Tax rate (%)
||Tax payable (a)
||15c for each $1 over $6000
||$2340 plus 30c for each $1 over $21,600
||$14,760 plus 42c for each $1 over $63,000
||$28,200 plus 47c for each $1 over $95,000
(a) Plus the 1.5% Medicare levy.
Undeducted contributions are made out of your after-tax income. No tax is paid on the contribution into your super (otherwise 15%) because it's already been taxed as part of your income. Earnings in super still incur tax at 15%, but this is generally better than your marginal rate.
Amounts invested in super in this way don't count towards your Reasonable Benefit Limits (see below) when you withdraw them at retirement, which makes them particularly useful if you're nearing retirement and worried about exceeding your limit.
TIP: Undeducted contributions to a low-income partner's super account can also be eligible for the superannuation spouse tax offset of up to $540.
Reasonable Benefit Limits (RBLs) are the amount you’re able to withdraw from super before marginal tax rates apply. After you exceed your applicable RBL, you will be subject to tax at the highest marginal tax rate if you take a lump sum; or marginal rates if you use your super to purchase a pension. Offsets can help reduce the tax impact if you do exceed the RBLs.
The maximum RBLs are currently $648,946 if you receive your money as a lump sum, or $1,297,886 if you receive at least half of it as a complying income stream (pension). RBLs are indexed every year in line with wages.
If your assessable income is below $58,000, making an undeducted contribution enables you to take advantage of the government's super co-contribution arrangement. If you earn less than $28,000, the government will pay $1.50 for every $1 you contribute up to $1500. If you earn between $28,000 and $58,000, co-contribution is reduced by 5 cents for every dollar of total income over $28,000.
TIP: if you're able to salary sacrifice to reduce your total income below the $58,000 co-contribution threshold, and then make undeducted contributions, the personal contributions are eligible for the co-contribution payments.
There is some work and cost involved in running a Self-managed Super Fund (SMSF) but it offers you some additional control over the tax benefits of super.
- Like other super, SMSFs are taxed only at 15% on contributions, and 15% on earnings.
- If your SMSF invests in shares that pay franked dividends, and get imputation credits of 30 cents in the dollar, you will get a refund of 15 cents in the dollar of tax paid by the company.
- Assets purchased after 1999 and held for 12 months (such as shares or property) in a complying super fund are eligible for a one third discount on CGT (they're taxed at 10% of the capital gain as opposed to 50% of your marginal rate outside of super).
Become self-employed and claim deductions
If you're self-employed, or substantially self-employed you may be eligible to claim a tax deduction for personal contributions to super. Self employment is defined as earning no more than 10% of income as an employee, including fringe benefits. While it is not for everyone, you can take advantage of the rules, for example, by salary sacrafice your earnings and live off investment income in one year to do this.
For contributions up to $5000, you can claim the whole amount. For greater contributions, you can claim the lesser of $5000 plus 75% of the excess over $5000 or your age-based maximum contribution limit.
Table 3: Super age-based contribution limits for the self-employed
|Age in years
for 2005–06 ($)
|50 and over