Superannuation has been specifically designed by the Federal Government to encourage individuals to set money aside (both through employer contributions as well as optional additional personal contributions) for retirement. When you are asking people to give up short-term wealth for long-term security, some sort of incentive is required; therefore, substantial tax benefits in the form of 15% tax on superannuation funds (as opposed to whatever marginal tax rate applies to your taxable income) were provided to encourage Australians to build retirement savings through superannuation.
But what happens if you want to withdraw your money before you retire? Depending on your personal circumstances, you may be able to access the money without penalty; but more likely, you will lose the tax benefit and be taxed at the marginal tax rate – which might end up costing you more than you would have paid if you hadn’t used super at all!
For example, imagine you earn $70,000 a year for thirty years. For the sake of argument, let’s also assume that you have 9.5% employer guaranteed superannuation contributions each year (it was previously 9% and will increase to 12% in the future, but let’s keep things simple). That would be $6,650 each year for thirty years, or $199,500. At 15%, you would pay $29,925 in tax.
With an income of $70,000p.a. if your employer wasn’t contributing that $6,650 into your super, your marginal tax rate would be 32.5% on that $6,650. Over thirty years, you would pay $64,837.50 tax on $199,500. If you withdraw all that money, on top of your $70,000 income, you would pay 32.5% on the first $10,000 of the super amount, 37% on the next $100,000 and 49% on the last $89,500 (we aren’t including the $70,000 regular income as that would be taxed at your marginal rate in any case, but it does push your super withdrawal into higher tax brackets).
So, instead of paying less than $65,000 spread over thirty years, you would pay $3,250 + $37,000 + $43,855 in tax in each of those three brackets mentioned, which is over $84,000 in one year! Keep in mind that if you leave the money in your fund until you are eligible to withdraw it would cost you less than $30,000 in tax.
So, if you don’t want to pay almost triple tax, how can you legitimately access your funds? According to the ATO website, the most common conditions of release for paying benefits are that the member:
- Has reached their preservation age and retires
- Has reached their preservation age and begins a transition-to-retirement income stream
- Ceases an employment arrangement on or after the age of 60
- Is 65 years of age (even if they haven’t retired)
- Has died
In upcoming articles, we will discuss Transition To Retirement and Preservation Age.
By Jennifer Lowe