Karl Hemmings and Tyron Hay
Since its introduction in 1992, the Superannuation Guarantee scheme and the evolution of the super industry more broadly, has worked consistently towards placing Australians in more financially sound positions for retirement. This article explores some of the more important elements of superannuation, including the various schemes that have been introduced over the years, in particular those most applicable to young Australians and university students. We explore:
- First Home Super Saver scheme and how it is assisting Australians in working towards the purchase of their first homes, through making concessional and non-concessional super contributions.
- Salary sacrificing and the benefits of this to young professionals.
- Smaller super contribution incentives including;
- Carry Forward rule
- Government Co-Contributions
- Self Managed Super Funds, and whilst not applicable early on in one’s career, they prove to be essential later on.
- Performance comparison, based on a small adjustment in fees, to reinforce the importance of minimising fees as to maximise returns.
First Home Super Saver Scheme
The First Home Super Saver (FHSS) Scheme is a relatively new super related initiative, introduced by the Australian Government in the 2017-18 Budget. This scheme has proven to be increasingly important since, particularly for those young Australians entering the property market for the first time. The ABC reported earlier this year that the Australian housing market saw its largest monthly home value increase since October of 1988, an increase across the index of 2.8%. With these unprecedented value increases in housing over the last 5 years, there has been increasing pressure on housing affordability. Ultimately, a scheme like the FHSS initiative is more important now than ever.
The FHSS scheme allows those saving for their first home to do so in their super fund, through making voluntary concessional and non-concessional contributions. The key concept here is that they must be voluntary, as in those contributions made by employers are not applicable.
In terms of the logistics of the scheme, savers can make maximum voluntary contributions of $15,000 from any one financial year, and a total of $50,000 (a new change since the 2021-22 Budget, up from $30,000), note that this doesn’t come into effect until 1 July 2022.
The key benefits from saving for your first home in your superfund revolve around taxation savings, forced saving and investment returns.
- Taxation savings come in the form of reduced tax attributed to those funds contributed on a voluntary concessional basis (pre-tax), with this being taxed at 15% upon entering your superfund. Further tax savings come in the form of taxation applied to capital gains and dividends, being at this same 15% rate, instead of one’s marginal tax rate.
- Forced savings refer to the nature of superannuation as a closed off saving vessel, that is you cannot access these funds for discretionary spending as people would be inclined to if saving elsewhere.
- Finally, there can be substantial investment returns associated with super savings, with these funds invested in equities, bonds, property and cash, by professionals, in order to maximise returns. Though there are obvious risks associated with investing savings intended for the purchase of property.
Self-Managed Super Funds
Self-Managed Super Funds (SMSFs) provide greater flexibility and discretion to those who utilise them, in determining where, when and how their retirement savings are invested and maximised. It is important to note that there are some significant administrative requirements in establishing and maintaining such a fund, and hence it is more appropriate for financial professionals or those more savvy with respect to investing.
The structure of an SMSF can differ, based on whether it is established with individual trustees, a corporate trustee or a single member. There are various nuances and legislation associated with each, and it is quite extensive, so it is best for those interested to research this themselves.
Regardless of the structure, the benefits associated with SMSFs are consistent across them. Of particular note are the fee benefits for high super balances, the benefits with estate planning and asset protection.
According to APRA, in studies conducted in 2017, for balances over $2 million, average ongoing fees for SMSFs were 0.69% on average, comparatively lower than those for public funds at 0.80% on average. Thus, for higher super the savings in terms of fees can be substantial enough to justify making the switch.
Those with substantial retirement savings are likely to be concerned with estate planning and asset protection too. In terms of estate planning, SMSFs offer far greater discretion when it comes to fund distribution upon a member’s death. Examples include paying dependents pensions, rather than a lump sum, and thus allowing the SMSF to continue to generate investment returns and accumulate funds. You can also utilise SMSFs in a discretionary trust like fashion, distributing funds to future generations in a more tax efficient manner. Finally, on the asset protection side of things, SMSFs protect funds against risks of bankruptcy and creditor claims. In particular, Super funds are not considered “property” when it comes to Australian Bankruptcy Acts.
Concessional contributions are contributions made into your super fund before tax and these contributions incur a tax of 15%. The most common form of concessional contributions, especially for younger people, is the Superannuation Guarantee (SG). As of 1 July 2021, the SG is set at 10% of an employees’ salary and set to increase in 0.5% intervals until 12% by 1 July 2025. To be eligible for the SG from an employer, you must be:
- 18 years or older, and paid $450 or more per month (before tax) OR,
- Under 18 years, being paid $450 or more per month (before tax) and working more than 30 hours per week.
This applies regardless of whether an employee is full-time, part-time or casual, or even if a temporary resident of Australia.
As of 1 July 2021, the concessional contribution cap increased to $27,500 from a previous $25,000 per year. This contribution cap may be even greater if you did not use the full amount of your cap in recent years thanks to the recent introduction of the ‘carry-forward rule’. The carry-forward arrangement involves accessing unused concessional cap amounts for a maximum of five previous years beginning in the 2018-19 financial year. Hypothetically, this means that for the 2021-22 financial year, an individual could contribute up to $102,500 (3 x $25,000 + 1 x $27,500) in concessional contributions if no prior concessional contributions exist in this period. To be eligible:
- Your total super balance at the end of 30 June of the previous financial year is less than $500,000.
The carry-forward contribution cap can be accessed through myGov by logging into ATO Online Services, and selecting Super, then Carry-forward concessional contributions.
Salary sacrificing is a tax effective strategy where you choose to have some of your before-tax income paid into your super account by your employer, on top of the 10% SG. The sacrificed component of your total salary package is not counted as assessable income for tax purposes.
Since concessional contributions are taxed at a rate of 15% and come from before tax income, this means that there is a significant tax advantage to making such contributions. For instance, if an individual earning $100,000 p.a before tax were to make $20,000 in concessional contributions, they would have reduced their taxable income to $80,000. As such, their total tax liability would be $16,987 (1) plus 0.15 * $20,000 = $19,987. However, if this individual were not to salary sacrifice, their tax liability would be $24,187. This generates a tax saving of $4,200. In addition to this immediate tax saving, there is also the advantage of investment earnings made inside the super environment benefiting from an equivalent tax saving. This could make a difference when you eventually withdraw your super savings and retire.
By utilising a strategy such as the carry-forward rule discussed above, it could be possible to reduce one’s tax liability even further by utilising unused concessional contributions from previous financial years.
Low Income Super Tax Offset
The low income super tax offset (LISTO) is a government superannuation payment of up to $500 to help low-income earners save for retirement. The offset is equivalent to 15% of the concessional contributions made into your super fund by either your employer or yourself. To be eligible:
- Earn $37,000 or less a year.
- You have not held a temporary resident visa at any time during the income year (note that New Zealand citizens in Australia are eligible for the payment).
The maximum payment you can receive for a financial year is $500, and the minimum is $10.
Government Co-Contribution Scheme
A further important scheme for low income earners is the Government Co-Contribution Scheme, which involves the government matching individuals who make personal non-concessional contributions to their super fund. This incentive is up to a maximum of $500 contributed by the government, however it can be a fantastic opportunity for young Australians, especially university students, to start boosting their retirement savings early.
The Government co-contribution does depend on your income and how much you contribute however, with the table below showing a basic outline of this.
An example of the benefits is that a $500 contribution by the government today when you are 20 years of age will be worth upwards of $10,000 in 50 years time when you are 70 years of age, using a conservative annual return of 6% (to take into account tax and fees).
Impact of Fees
A small difference in annual fees can have a significant impact on your retirement savings. In the below example, we assume an individual age 20 is earning $80,000 p.a. and receives a SG of 10%, with no additional contributions. Based on a return of 8% p.a and fees of 0.5% p.a. in scenario 1 and 1.5% p.a in scenario 2 the difference in savings is $757,178. Note: these figures are not adjusted for inflation.
- Performance: https://www.afr.com/wealth/personal-finance/how-top-super-funds-see-the-future-20210727-p58df1
- ATO Superfund Comparison: https://www.ato.gov.au/Calculators-and-tools/YourSuper-comparison-tool/ . (A new super comparison tool to compare super funds and their fees/returns, to assist with researching the optimal fund)
Karl Hemmings is a Research Analyst for UNIT (University of Melbourne), whose work primarily focuses on the intricacies of investing.
Tyron Hay is a Research Analyst for UNIT (University of Melbourne), writing primarily on recent macroeconomic trends and personal finance developments.
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Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.