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What is superannuation?

What is superannuation?

You may know it as a pension plan but in Australia we call it superannuation – super for short. It’s your way of saving money during the time you work for your retirement.

How does it work?

When you start working in Australia your employer must contribute a percentage – 9.5% in 2015/16 – of the money you earn during ordinary hours of work. It’s called a super guarantee.

Your employer pays this 9.5% directly into your super fund.

Most people can nominate their preferred super fund by informing their employer which fund they would like super contributions to be paid to.

If you do not nominate a preferred fund then your employer will pay your super contributions into a default super fund.

Unless you opt for a self-managed super fund (SMSF), your super fund will generally do the investing for you, with professional managers aiming to achieve growth over time. That said, most funds allow members to select from a range of investment options based on their risk and return preferences.

Topping up your super

While you’re working in Australia you may want to increase (top up) your super. You can do this before or after income tax is deducted.

  • With Concessional (before tax) contributions you agree to give up some of your salary before tax is deducted in exchange for additional employer contributions. These are often called salary sacrifice schemes. If you are self-employed you may also be able to make a superannuation contribution and claim a tax deduction on the amount contributed. This is called personal deductible contribution.
  • With Non‑concessional (after tax) contributions you can make personal contributions from your after tax salary, up to a limit, which you can check on at the Australian Taxation Office (ATO) website

Understanding tax on super

Super is taxed differently to other income you earn. For a more comprehensive view on this, you can visit the ATO website. Below are a few of the rules you’ll often see referenced.

1. Contributions

Employer, salary sacrifice and personal deductible contributions to your fund are generally taxed at 15%, while after-tax contributions do not attract any additional tax

2. Investment earnings

You’ll also generally pay a maximum of 15% tax on what you earn in a fund. One thing to be aware of, though, is the Australian government restricts when and how you access your super. Unless you meet certain exceptional criteria, you’ll need to wait until you retire to get hold of your super.

3. Tax on withdrawals

When you are able to access your super, you can choose the way in which you do this. If you are aged 60 or more, withdrawals from your super are generally tax free.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.