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Super is seriously tax friendly

You often hear that super is great from a tax perspective. Here's what that actually means.

Superannuation is really just an environment for your money to grow, but from a tax perspective it is one of the best places you can find.

One of those benefits can be tax. Super is a tax effective environment because:

  • money contributed as a pre-tax contribution into super (Superannuation Guarantee, salary sacrifice and personal tax deductible contributions) is generally taxed at 15 per cent which is lower than most people’s marginal tax rates, please note that high-income earners may pay a higher rate,
  • interest, investment income and capital gains inside super are also taxed at a maximum of 15 per cent.

The trade-off for these tax perks is that your money is ‘preserved’ until retirement, so you can’t generally access it until at least age 55.

How much can you save?

Any benefit you can get depends on the marginal tax rate you’re currently paying.

Your income Your marginal tax rate
(including 2% Medicare levy)
Your potential savings inside super
0 - $18,200   0%
0%
$18,201 - $37,000 21% 6%
$37,001 - $80,000 34.5%
19.5%
$80,001 - $180,000

39%

24%
$180,001 - $299,999

49% (including 2% debt reduction levy)

34%
$300,000 and over

49% (including 2% debt reduction levy)

19%

  

What can you do about it?

Here are some strategies that could help you make the most of those potential savings.

Consider starting a salary sacrifice arrangement.¹

If you ask your employer to put some of your salary into super, before it goes into your pay packet, this amount will be taxed at 15 per cent (if you earn less than $300,000 pa) instead of your marginal tax rate.

Consider moving some of your savings into super.

If you have a large amount of cash or other investments outside super that you won’t need to access any time soon, you may consider moving them into super. That way the interest or investment earnings (including any capital gains) would be taxed favourably inside super. Just be careful of capital gains tax if you’re selling any investments to do this and also remember that there are limits¹ on the amount that you can contribute to your super.

Investigate whether you can take out life insurance in super.

You can potentially use the tax savings and other concessions in super to help you take a higher level of life insurance cover than you may be able to afford outside super. That’s because you can use before-tax income to pay for insurance (eg through your pre-tax super contributions), rather than having to pay for it using your regular savings (after-tax).

Consider a pension account.

If you’re over age 55, you may be able to turn your super into a pension account to save even more tax. This means you need to start drawing an income from your super (which could be ideal if you want to work less) but the biggest benefit is that it moves your super balance into a tax-free environment.

Everyone’s tax situation is different, so it’s important to get some advice from your accountant and/or financial planner to make sure you’re doing what’s best for you.