What is Superannuation Guarantee?
The Superannuation Guarantee is a compulsory system of superannuation support for Australian employees, paid for by employers. The system was introduced in 1992.
Employers pay a percentage of the ordinary time earnings of their employees (including part-time and casual employees) who are aged over 18, and who are paid $450 (before tax) a month, into a complying superannuation fund or retirement savings account. This article summarises the key features of the scheme.
Who is eligible for Superannuation Guarantee?
If you are 18 years or older, and are paid $450 or more per month (before tax), you are entitled to superannuation contributions from your employer.
What types of contributions can I make?
The two most common types of superannuation guarantee contributions are concessional (before tax) and non-concessional (after-tax).
Concessional contributions include:
- Employer contributions, (including compulsory superannuation contributions)
- Salary sacrificed contributions
- Personal contributions where a tax deduction is allowed (only applicable if you are self employed and less than 10% of your income comes from salary or wage related activities).
Non-concessional contributions are effectively contributions made to a fund for which a tax deduction has not been claimed. They may include:
- Personal contributions made from an individual’s after-tax income for which they have not claimed a tax deduction
- Amounts transferred from a foreign super fund to the extent that it does not form part of the assessable income of the fund
- Contributions in excess of a member’s concessional contributions cap.
Can I choose which fund I pay superannuation guarantee into?
From 1 July 2005, changes to the law mean that many Australian employees are able to choose the fund their employer’s future superannuation guarantee contributions are paid into. Choice of superannuation funds allows workers to:
- change funds when their current fund is not available with a new employer;
- consolidate superannuation accounts to cut costs and paperwork;
- change to a better performing superannuation fund.
Most people can choose the fund into which their contributions are paid, as long as it is a complying fund. A complying fund is one that receives concessional tax treatment due to being regulated under the relevant superannuation legislation, and that has not been issued with a notice of non-compliance.
Types of superannuation guarantee funds
There are five basic types of funds, but it is the funds themselves that decide who can join.
- Public sector funds: These funds are generally open to Commonwealth, state and territory government employees.
- Corporate funds: These funds are generally only open to people working for a particular employer or corporation.
- Industry funds: These funds are sometimes open to everyone. Otherwise, you can join if you work in a particular industry or under a particular industrial award and your employer signs up with the fund.
- Retail funds: These funds are open to everyone. They are run by financial institutions.
- Self-managed super funds (also called SMSFs): SMSFs work like any other super fund, but the responsibility of managing it rests solely with the trustee (you).
Superannuation guarantee – things to watch out for
When making contributions to your self-managed superannuation fund, it is important to take into consideration any of the following arrangements as these are often missed when it comes to calculating limits:
The Superannuation Guarantee has concessional contribution caps; these may change slightly, but for the 2014/2015 year the caps are $30,000 if you are under 50 and $35,000 if you are 50 or over. Contributions up your concessional limit are taxed at 15%; as this is below the rate of income tax it is an effective way of saving. If you exceed your limit however, tax increases to 30%, and this is designed to stop high earners from abusing the tax concession.
- Salary sacrificed amounts: Are counted towards your concessional contributions caps on top of any superannuation guarantee payments made by your employer. Ensure that when you enter into a salary sacrifice arrangement, that the additional contributions do not push you over your concessional contributions cap
- Employer paying expenses on behalf of your fund:These payments are also often included as concessional contributions. A common example is where an employer pays life insurance on behalf of an employee. This may be a policy held by your SMSF or a separate superannuation policy where your employer claims a tax deduction for the premiums paid. These sorts of arrangements will also count towards your concessional contributions cap
- Having more than one Fund or employer: Often people forget that the contribution caps apply on an individual basis, not a per fund basis. This results in contributions often being missed or disregarded. It is important that you keep track of all contributions made on your behalf to all of your funds
- Paying expenses on behalf of your fund:Paying expenses on behalf of your fund essentially increases the capital of the fund, and therefore counts as a contribution. Ensure that if you pay an expense on behalf of your fund, that it does not result in excess contributions. Alternatively, ensure that the fund reimburses you in a timely manner if you are concerned about breaching your contributions caps.
Tips for managing your Superannuation Guarantee fund.
- Make sure your fund has your tax file number.If your fund does not have your tax number recorded, you can be hit in three ways. Firstly, you can be hit with penalty tax; in addition, you won’t be able to make non-concessional contributions and you will also be excluded from the co-contribution scheme.
- Minimise your fees.All superannuation funds incur fees, and if you have more than one fund you will be incurring more than one set of fees; by combining your funds, you can save thousands of dollars in fees.
- Nominate your beneficiaries. Identifying who will receive your superannuation benefits when you die is particularly important if the beneficially is a financially independent adult. Nominating your beneficiaries can potentially save your estate thousands of dollars in tax.
- Plan your retirement income. For your fund to work for you, decide what you want your retirement income to be; you can then calculate how much to contribute to your superannuation guarantee fund.
Superannuation guarantee is a detailed and complex area. I have covered the very basics above, but for more detail, visit the relevant sections of this website.