An E-Book by Andrew Bowring B.Ec(Syd) Dip FP
I think of all the investment vehicles around superannuation is the least understood. I do
believe the reason for this is the way that successive governments have continually changed
the rules and that single feature has tended to undermine peoples confidence in
superannuation as a retirement savings vehicle and the whole superannuation system in
When it is all pared back to the bone superannuation is really pretty simple – you invest money
for your retirement – it is pretty straight forward.
But, government changes and an industry with its weird language has managed to complicate
this pretty simple concept.
My objective here is to make superannuation easy to understand. I don’t want to get bogged
down in the legal technicalities of super – I just want to present a clear and easy to understand
guide that will help you to make better superannuation decisions.
Prior to the late 1980’s superannuation was really only provided for public servants and some
employees in big companies. Paul Keating changed all that when he and Bill Kelty worked on
The Accord, which was an agreement between business, government and the trade unions that
introduced superannuation for all employees.
Kelty and Keating managed to convince the business lobby that the trade union movement
would sacrifice wage increases for a standard superannuation contribution to be known as the
Superannuation Guarantee Charge of SGC. The SGC started at 3% back then and has steadily
increased to be 9.5% of all wages paid in Australia.
All the way along the government has recognized that self employed people don’t get the SGC,
so they allow those people to make contributions on their own and get a tax deduction for any
money they do contribute.
Money gets into your superannuation fund by way of contributions. Contributions can only be
made by people entitled to make a contribution to your super fund. The two possible
contributors to your super fund are:
i) Your Employer, or
Your employer is obliged under the SGC to make a contribution on a quarterly basis equivalent
to 9.5% of your salary, this includes overtime. Your super find can accept contributions from
your employer or you. You can make 2 types of personal contributions to your own super fund;
i) A Concessional Contribution – this is a contribution that you make up to your
concessional contribution limit and you can receive a tax deduction for this
ii) A Non-Concessional Contribution – This an amount contributed from your own
savings that you do not receive a tax deduction for, and again there is a Non-
concessional limit to these contributions.
Why are there limits on how much you can contribute to super?
The government restricts your ability to place unlimited funds in super. The reason is that super
is taxed at a lower rate than your personal tax rate. Super funds only p[ay 15% tax on their
investment earnings, whereas you might pay up to 48% on investment earnings that you
earned in your own name. So the government limit the amount of tax advantage you are
These limits are:
Concessional Contributions – you are allowed a total concessional (tax deductible) contribution
of $25,000 per year. So, of your employer contributes to your fund then that is counted as
“concessional”. So if your employer makes SGC contributions of $10,000 in a year you are able
to “top-up” this amount with an additional $15,000 of your own and receive a tax deduction for
Non-Concessional Contributions – You can make non-concessional contributions of up
to$100,000 each year. If you are under 65 you can use the “brig forward rule” which allows you
to make 3 years contribution on one year – so $300,000 – but then you have used your non-
concessional contribution cap for the following 3 years and you cannot contribute any more in
that 3 year period.
What Types of Funds are Available?
There are basically 3 types of super fund that you can contribute to, but there are lots of
choices in each category – they types are:
i) Industry Super Funds
ii) Retail Super Funds
iii) Self Managed Super Funds (SMSF)
Industry Super Funds
Most of us have heard of these funds, they tend to be related to an industry (HESTA for health
workers, CBUS for construction) but some are just general funds like Australian Super. The
general characteristics of these funds are:
• They are not for profit so benefits are usually returned to members
• They are low in fees
• They offer competitive insurance rates
• You can easily transfer from one to another
• They have simple investment options (ie. “balanced”, “growth” etc)
Retail Super Funds
Again, these are fairly recognizable brands – the general characteristics of these funds are;
• They will often have a wide choice of investment options like buying shares, many
different managed funds and lots of options to switch investments
• After years of competition against industry funds their fees have now become more
• You can include insurance but it is often more expensive than industry funds.
Self Managed Super Funds (SMSF)
Self Managed Super Funds are managed by you – it allows you to select the investments and to
report directly to the ATO. The main characteristics are:
• The fund can have up to 6 members
• The fund can invest in most things but is often used to purchase direct property for the
Note – SMSF’s have fixed fees that must be paid, so, generally speaking it is recommended that
the members have a combined fund balance in excess of $150,000 to consider this option.
Once you have chosen the fund you want to be in you need to select your investment mix. For
most funds you will have a basic selection according to the style of investment you want. So
funds often break these categories into groups like:
As an example you can see from this chart how different options have performed.
You need to be assessed to determine which grouping best suits you, and this can be done via a “risk
profile questionnaire”. This will determine what type of investor you are and which category you will fall
into. These are usually available on the fund’s website or you can just download one online.
If you want a little broader selection most funds allow you to construct your own unique portfolio, but it
is recommended that you seek professional assistance when doing this as investment selection can be
Salary sacrifice is an arrangement with your employer to forego part of your salary or wages in return
for your employer providing benefits of a similar value. One example of a salary sacrifice arrangement is
to have some of your salary or wages paid into your super fund instead of to you.
If you make super contributions through a salary sacrifice agreement, these contributions are taxed in
the super fund at a maximum rate of 15%. Generally, this tax rate is less than your marginal tax rate.
Click here for more information.
Here is an example of how salary sacrificing will help to boost your end super balance
Retirement ages for superannuation are different from when you would be eligible for an Age Pension
from the Government. When you turn 60 all of your superannuation benefits are available to you if you
meet a condition of release. The usual condition of release is that you have retried. If you are over 60
and you have retired permanently from the workforce you can access your super benefits. You may not
be eligible for an Age Pension until you turn between 65 and 67 depending on when you were born.
You can access your super by taking a tax free lump sum, or by leaving your accumulated benefit in the
fund and taking an income stream from it, this is an account based pension. If you elect to take the
account based pension you can change your mind and go back to a lump sum at some point in the
The reason that you would consider an account based pension is because the super fund balance does
not pay any Capital Gains Tax inside the fund and your monthly pension payment is tax free.
There are considerable advantages in taking an account based pension and it is really important that you
get professional advice at this point.
Australia’s superannuation system is the most advanced in the world, it is a tremendous way
for you to accumulate wealth for your retirement – but it is quite complicated.
There are lots of ways for you to maximize your super balance and provide you with tax
benefits as well, these include things like:
Small Business Rollover Relief - If you own a small business and you sell it the sale
proceeds may be able to be contributed to super saving
Downsizer Contributions - If you sell your home after age 65 you may be able to use
those proceeds to make additional super contributions.
Government Co-Contributions - People on low incomes can get assistance from the
government to make additional contributions.
Divorce and Separation - Partners may share their end super balances in the event
of a split.
Super is a bit tricky – so don’t hesitate to get good advice.