The Tax Benefits of Managing Your Own Super

Article supplied by The SMSF Club

When it comes to tax, superannuation is an investor’s paradise. The Government provides significant tax breaks within superannuation, but what are they?

If living the lifestyle you deserve in retirement, and having the flexibility to do what you want, when you want is not enough incentive alone, the Government provides us with huge incentives to focus on superannuation.

Superannuation tax explained

The main way that many Australians invest money into their super is through Superannuation Guarantee (SG) contributions. These contributions are the compulsory component of your income, which your employer must pay on your behalf. The compulsory contribution amount is currently 9% of an employees’ salary (As at Jan 2013), and will be gradually increasing over the next 7 years from 9% to 12% (ATO). These SG contributions are also referred to as pre-tax contributions or concessional contributions.

Pre-tax contributions

This is where money is contributed into super in lieu of taking it as wages. This can be via employer contributions (SG Contributions as described above); salary sacrifice or self employed people making contributions for which they receive a tax deduction. A flat 15% contributions tax applies to these contributions, if you earn less than $300,000 per annum. If you earn above $300,000 per annum, the contributions tax rate is increased to 30%. If you earn less than $37,000, the effective tax rate is zero when you include the Government low income superannuation contribution detailed below.

Low income super contribution

On the 1st July 2012, superannuation became even more attractive as a vehicle to accumulate assets for lower income earners. For Australians who earn up to $37,000 per annum, the Government now makes an additional contribution into their super fund. The low income super contribution (LISC) is 15% of the eligible concessional contributions (including employer contributions), made up to $500 per year. This effectively reduces the contribution tax for those eligible Australians to zero.

Whilst superannuation contributions are taxed, now with the LISC scheme, the tax rate is either equal to or a lot lower than the marginal income tax rate for all Australians.

After-tax contributions

This is where money is contributed into super from after-tax money. No contributions tax applies to these contributions, as income tax has already been paid on the money. After tax contributions are known as non-concessional contributions.

Accumulation Phase

Tax on earnings in the accumulation phase

Investment earnings within superannuation are taxed at a flat rate of 15% (as at July 2012). Where the asset has been held for longer than 12 months, any realized capital gains are taxed at 10%. When an asset is sold within 12 months, the gains are taxed at 15%. In most cases, these rates of tax are less than our personal rate of tax.


Sue inherits $100,000 from a relative and is trying to decide whether to invest the money in her own name or in her superannuation. Sue is aged 45, and works full time earning $80,000 per year. Sue is a balanced investor; so let’s assume an annual return of 8% (4% income and 4% growth). The table below shows a total tax saving of $2,120 in the first year, by investing the money into superannuation as a non concessional contribution, assuming that Sue sells her assets just prior to the end of the first year. Sue has made an after tax return of $6,800 by investing the inheritance in her superannuation; versus only $4,680 had she invested in her personal name. This is over a 40% greater return just because the inheritance was invested within super.


Personal Name


Initial investment



Investment income



Less income tax



Capital growth



Less tax



Investment value




Pension Phase

Tax on earnings in pension phase (when you are over 60 and deemed retired).

Upon reaching the age of 60 and permanently retiring, the tax rate in superannuation drops to 0%. This means that you can wait to sell your accumulated assets in superannuation until the age of 60, and sell those assets completely tax free! (Please note however, your super fund will not automatically convert to pension phase. You should consult your professional investment adviser.)


Sue has now reached age 60 and wants to retire at Christmas time. Sue has not sold any of her assets since investing the inheritance, so she has significant capital gains. When Sue retires she wants to draw an income stream from her investments, and also go on a big overseas holiday, so she needs to sell down some of her super. We have assumed Sue’s investment is now worth $300,000 and she has $200,000 in unrealised capital gains. The table below shows that Sue will save a massive $35,200 in tax by having her money invested in super, and deferring the sale of her investments until retirement.


Personal name


Capital gains



Less tax



Net proceeds




This is again a huge difference and highlights that superannuation can be simple and when it comes to saving tax, an investor’s paradise!

Superannuation tax summary

Contributions Tax – If you earn less than $37,000 per annum, your effective contribution tax is reduced to zero with the assistance of the Government’s low income superannuation contribution (LISC). If you earn more than $37,000 but less than $300,000 you pay 15% tax on contributions. If you are a very high income earner, earning more than $300,000 per annum as an individual, you will pay a flat 30% contributions tax. While the 30% is double the contributions tax of lower income earners, it is still well below the individual’s marginal income tax rate.

Tax on income – Flat 15% tax on investment earnings during the accumulation phase. Tax free income stream in retirement (after age 60).

Capital Gains Tax – 15% capital gains tax if the asset is sold within the first 12 months. 10% capital gains tax during accumulation phase, if asset held for longer than 12 months (331⁄3 discount on the Capital Gain Tax Rate of 15%). 0% capital gains tax during the pension phase (retirement).

How much can I contribute to super each year?

Due to super being such a tax effective vehicle, the government has imposed limits on the amount of money you can contribute each year. Concessional (pre-tax) contributions are limited to $25,000 per financial year. Non-concessional contributions are limited to $150,000 per financial year. However, if you are under the age of 64 at any time during a financial year, you are able to ‘bring forward’ up to two future years’ contributions, which entitles you to contribute a maximum of $450,000 over a three-year period.

Why does the government provide so many tax benefits for Australians to invest within superannuation?

We would all like to think the tax incentives provided within super are a gift provided by the Government in recognition for all the hard work and personal contributions made to the growth of the economy for decades through taxes, however there are bigger picture reasons, such as an aging population in Australia.

As baby boomers fast approach retirement, the Government will either have to pay these baby boomers the age pension to fund their lifestyle in retirement – the financial consequences of which would be dire – or provide as many incentives as possible now to ensure people accumulate sufficient assets to be financially independent in retirement.

In early 2013, the Government announced further changes to superannuation in Australia. It is important to stay up to date with changes in rules and restrictions. Visit for more information about the current changes.

* The information provided in this communication is correct as at July 2012 – for up-to-date information, please contact the ATO, or visit their website:

If you would like to learn more about Self Managed Super Funds, register now for the next SMSF Education Evening, hosted by Justin Beeton, Founder and Managing Director of The SMSF Club.

Locations include Adelaide, Perth, Melbourne, Brisbane and Sydney.


Disclaimer: while due care is taken, the viewpoints expressed by contributors and/or sponsosrs do not necessarily reflect the opinions of Your Investment Property.




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