The financial lifecycle model is a simple framework to help you understand wealth accumulation and cash flow generation—your progression from financial dependence to independence.
Importantly, we all tend to invest in either one or more of the different types of asset classes to help us achieve our financial goals (a common financial goal for many of us is financial independence in retirement).
Furthermore, these assets invested in are held via either one or more of the different types of investment structures.
Compared to other investment structures, super is widely considered to be one of the most tax-effective investment structures available from a wealth accumulation and cash flow generation perspective.
Although not a comprehensive list, below are 11 of the top tax facts about super. Please note: Each tax fact isn’t covered in detail (only a brief snapshot is provided)—other important considerations go with each. For example, it’s important to consider things such as contribution eligibility, and conditions of release.
Super investment structure
When investing via super, it’s important to understand that there is an accumulation phase and a retirement phase. From a life stage perspective:
With the above in mind, from a tax perspective, the tax facts listed below are grouped according to their relevance to each phase. For example, the tax facts regarding contributions are underneath the title ‘Super (accumulation phase)’, as contributions can’t be made to a super account in retirement phase.
Super (accumulation phase)
1. Investment earnings in your super. Investment income is generally subject to a maximum of 15% tax. And, capital gains on assets held for longer than 12 months receive a 1/3 (33%) tax discount, which effectively reduces the tax rate to 10%.
2. Concessional (pre-tax) contributions to your super. The amount contributed is reduced by a tax of 15% (contributions tax). When considering salary sacrifice and personal deductible contributions (types of concessional contributions), this tax of 15% may be lower than your marginal tax rate. Please note:
3. Non-concessional (after-tax) contributions to your super. The amount contributed isn’t reduced by a contributions tax. Please note:
4. Insurance in your super. Your super fund trustee can generally claim the insurance premiums as a tax deduction, reducing the tax paid by your super fund trustee on your concessional contributions and super earnings. The tax saving is often rebated to your super account, effectively reducing the premium cost by 15%.
5. Saving for a home deposit via your super. If you make voluntary contributions, you may be eligible to withdraw all or part of these contributions plus associated earnings for use as a deposit via the First Home Super Saver Scheme. Please note:
6. Small business capital gains tax (CGT) concessions. If you are considering selling a small business or the assets it uses, you may be eligible for CGT concessions that help reduce the taxable capital gain associated with the sale, and build your super retirement nest egg in the process. Please note:
7. Pension payments from your super. Pension payments from an accumulation phase transition to retirement income stream (TRIS) are generally tax-free if you are aged 60 or over. If you are under age 60, the taxable portion of pension payments is taxed at your marginal tax rate, less a 15% tax offset.
Super (retirement phase)
8. Investment earnings in your super. Investment income and capital gains are generally tax-exempt. Please note: The transfer balance cap, which is currently set at $1.6 million (indexed) per person, limits the amount of super benefits that can be transferred to retirement phase.
9. Pension payments from your super. Pension payments received from a retirement income stream (eg account-based pension or retirement phase TRIS) will be tax-free to you if you are aged 60 or over at the time of receiving the pension payment.
Super (accumulation or retirement phase)
10. Lump sum withdrawals from your super. Any lump sum withdrawals made after 60 years of age are generally tax-free. If you make a lump sum withdrawal and you are aged between preservation age and 60, the taxable component of the lump sum is taxed as follows:
11. Passing away and your super:
However, when the reversionary beneficiary turns 60, the pension payments from the reversionary death benefit income stream are tax-free.
After reading this article, you may also find of interest the following:
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