This is an example of what superannuation is and the superannuation rules.
To provide you with an example of superannuation, it is important to first understand why superannuation exists.
First and foremost, superannuation is a place that you invest your savings.
The benefit of investing in superannuation is that all earnings received from your investments are taxed at a concessional rate.
The concessional rate is 15%. Tax on capital gains can be as low as 10%.
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Therefore, the benefit of investing in super is a reduction in tax.
The downside of investing in super is that you are unable to access your super until you meet a condition of release.
The most common condition of release is retirement.
Retirement for superannuation purposes is defined here.
A way of getting early access to super prior to retirement is by using your super to start a transition to retirement (TTR) income stream.
To start a TTR income stream, you need to have reached your superannuation preservation age.
Detailed below are some superannuation examples.
Superannuation Example: Contributing to Super
The most common form of superannuation contributions are mandated employer superannuation guarantee (SG) contributions.
SG contributions are compulsory contributions made into your super account by your employer.
An employer is generally required to pay 9.5% of your wage into your super account.
For example, if you earn a wage $70,000 per year, your employer must pay $6,650 per year into your super, in addition to your wage.
Superannuation Example: Types of Contributions
Salary sacrifice contributions are made by forfeiting part of your wage in exchange for equivalent contributions into your super.
For example, if you had a wage of $70,000 per year, you may choose for $10,000 of this to be contributed to super, instead of being taxed and paid into your bank account.
The remaining $60,000 is then assessed and taxed at your marginal tax rate.
Salary sacrifice contributions are generally taxed at 15% upon entering super instead of being taxed at your marginal tax rate.
Non-concessional contributions are contributions made to super with personal bank savings.
A personal tax deduction is unable to be claimed for making non-concessional contributions.
Personal concessional contributions are contributions made to super with personal bank savings also.
However, unlike non-concessional contributions, a personal tax deduction can be claimed for the amount contributed.
Employer SGC contributions, salary sacrifice contributions and personal concessional contributions are all concessional contributions.
They are called concessional contributions because a tax deduction is claimed by the contributor.
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The concessional contribuiton cap is $25,000 per person, per year.
However, more may be able to be contributed using the concessional contribution carry forward catch-up provisions.
The non-concessional contribution cap is $100,000 per person, per financial year.
However, more may be able to be contributed while under age 65 using the bring-forward rule.
Superannuation Example: Tax Benefits
All earnings within a superannuation accumulation account are taxed at 15%.
This rate applies to income earnings and realised capital gains.
For example, if a super accumulation balance of $100,000 earned income distributions from investments of $4,000 for the year, this income would be taxed at 15% and $600 in tax would be deducted from your account.
Capital gains tax is effectively reduced to 10% (after a 1/3rd discount) for realised capital gains resulting from the sale of an investment that was owned for more than 12 months.
For example, if you bought an investment within super for $50,000 and sold it 2 years later for $60,000, you would pay 10% CGT on the gain.
The CGT payable in this example would be $1,000 (calculated as $10,000 x 15% x 2/3rds)
If you use your super accumulation account to start a retirement income stream (other than a TTR pension) all income and capital gains are taxed at a rate of 0%.
Detailed below are examples of the personal tax benefits from making certain types of superannuation contributions.
Salary sacrifice example
If you earn a wage of $70,000 p.a. you will pay income tax of around $15,167 (2018/19).
If you salary sacrifice $10,000 of this wage into super, you will pay income tax on the remaining $60,000 of $11,617, plus contributions tax of $1,500 (15%) on the $10,000.
As you can see in this example, salary sacrificing will reduce your overall tax by $2,050.
If you are a low income earner, you may be eligible for the low income super contribution, designed to refund contributions tax.
If you are a high-income earner, you may be required to pay an additional 15% contributions tax, designed to provide superannuation equality.
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Personal Concessional Contribution Example
If you have an assessable income for the year of $100,000, but made a personal concessional contribution of $15,000 sometime during the year, you will receive a personal tax deduction for $15,000.
This will reduce your taxable income from $100,000 to $85,000, saving around $3,525, after taking into account contributions tax.
Personal concessional contributions were previously only available to self-employed individuals.
New rules allow employees to also make personal concessional contributions.
Let me know in the comments below if there is a different type of superannuation example you would like to see.