Traditionally the primary driver behind Superannuation strategies, the tax breaks available to funds held within Super, have been a contentious and varying topic. As it stands, there are still advantages for employing a well-constructed superannuation contribution strategy.
You may remember back to a previous article where we discussed the various types of contributions that can be made to a Super Fund. Perhaps the most common form of contribution is the “Concessional Contribution”. This is where an individual sacrifices some of their income to be saved in their Super Fund.
While the individual does not have access to these funds until they retire, they are eligible to claim a tax deduction of up to $35,000 (depending on their age) for these savings. This means that if the person has a marginal tax rate above 15% (the Super Fund rate), they make an effective tax saving of that difference.
Moreover, any earnings that are made on these savings are simply taxed at a flat rate of 15%. Considering that an individual will pay their marginal rate on any investment earnings (up to 46.5%) there may be considerable benefit in utilising a Salary Sacrifice strategy.
However, where superannuation benefits really come in to their own is when the members get closer to retirement.
When a member reaches “Preservation Age” (currently 55), they are eligible to enter into a Transition to Retirement phase. By taking a portion of their fund as a pension (which can be re-contributed), the member is able to acquire a tax free status for a large part of the fund. In this phase, earnings made by the fund are not taxed, while contributions can still be made to increase the value of the fund.
When it comes time for the members to fully retire and rely on their superannuation, the fund moves into a complete pension mode. In this phase, there is no tax on any part of the fund. However, if members wish to make further contributions, there will be taxation implications.
Navigating this complex series of rules and regulations can be stressful for anyone, whether they are members of a large Super Fund, or trustees of their own SMSF. If you require any assistance, or wish to understand the world of Superannuation better, feel free to contact our superannuation team at CNS Partners.