How Superannuation is Calculated

Introduction

Have you ever wondered what your life will look like once you retire? Having a sufficient super balance could mean the difference between counting your pennies or kicking back and making the most of your retirement. With that said, it can help to understand how your super is calculated to help you make the most out of your superannuation.

Overview of Superannuation in Australia

For many Australians, their super is the main way they fund their retirement. As a salaried employee, your employer is generally required to contribute a portion of your earnings into your super (i.e. Super Guarantee) if you are over 18 years old. For those under 18 years old, you must work more than 30 hours in the week to be entitled to receive compulsory super contributions. The Australian Government made this decision to ensure that every working Australian is able to fund their retirement. Aside from the Super Guarantee, you are also able to make voluntary contributions each year up to a certain amount.

Importance of Understanding Superannuation Calculation

If you are employed, it’s essential to understand how your super is calculated to make sure your employer is making sufficient super contributions. In most cases, your super will fund your retirement, so it’s important to make sure your super is being paid to set yourself up for the future.

Factors Influencing Superannuation Calculation

There are several key factors that can impact how your super is calculated. Here’s an overview of how to calculate your super contributions.

Contribution Types

There are several types of super contributions. Here’s a quick breakdown of some of the different contribution types.

Employer Contributions (Superannuation Guarantee)

Under super laws, your employer must generally pay a minimum super contribution of at least 11.5% of your ordinary time earnings into your super account this FY25. This minimum payment is referred to as the Super Guarantee (SG).

Voluntary After-Tax Contributions

Generally, you can grow your super by making voluntary contributions on top of your SG contributions. Even a small amount can grow over time. Plus depending on your individual circumstances, voluntary contributions may potentially reduce the amount of income tax you pay.1

Salary Sacrifice Contributions

Also known as voluntary pre-tax contributions, you can ask your employer to pay a portion of your pre-tax salary directly into your superannuation fund instead of receiving it as take-home pay. These contributions are more widely known as “salary sacrifice” contributions and are made in addition to your SG contributions. Similar to after-tax voluntary contributions, making salary sacrifice contributions can be a tax-effective way to boost your super savings, depending on your individual circumstances.1

Government Contributions (Co-Contribution and Low Income Super Tax Offset (LISTO))

The Government has also implemented some initiatives designed to help low-income earners boost their retirement savings. Low or middle-income earners who make after-tax contributions to their super fund may be eligible for a government co-contribution of up to $500.¹

Similarly, if you earned less than $37,000 this financial year, you may qualify for the LISTO payment of up to $500.¹ 

More information on contribution types can be found on the ATO website or from a registered accountant.

Contribution Caps and Limits

The government has put in place certain caps to limit how much one can benefit from super tax concessions. There are concessional contributions cap and non-concessional contributions cap.

Concessional Contribution Cap

Concessional contributions are super contributions made with pre-tax income, such as, but not limited to, employer contributions and salary sacrifice contributions. The cap is the maximum contribution you can make to your super fund each financial year under the concessional contributions tax rate of 15%. This tax rate is lower than Australia’s income tax rates, making it an incentive for some to voluntarily contribute to their super if their contributions under the Super Guarantee falls below the cap. 

Between 1 July 2021 and 30 June 2024, the concessional contributions cap was $27,500 per year. However, this cap has increased to $30,000 from 1 July 2024. Do note that this may be adjusted by the ATO at any time.

Under the carry forward rule, if your total superannuation balance is less than $500,000 on 30 June in the previous financial year, you can carry forward unused portions of your concessional contributions cap for up to five years.

Non-Concessional Contribution Cap

Non-concessional contributions are those made after tax, such as personal contributions from your take-home pay and spouse contributions. From 1 July 2024, the non-concessional contributions cap is $120,000 p.a. This cap is reassessed annually to remain in line with Average Weekly Ordinary Time Earnings (AWOTE). If you contribute more than the cap, you may have to pay extra tax.

According to the bring-forward arrangement, individuals under 75 years of age can bring forward up to three years’ worth of non-concessional contributions, allowing for a total contribution of up to $360,000 over three years. This cap is prorated for individuals who turn 75 during the financial year. 

More information on contribution caps can be found on the ATO website or from a registered accountant.

Superannuation Taxes

Superannuation taxes generally differ depending on whether contributions are concessional (pre-tax) or non-concessional (after-tax).

Contributions Tax

A 15% contributions tax is applied to eligible concessional contributions when they are made to the superannuation fund. If you earn $37,000 or less, the tax may be paid back into your super account via LISTO.1

For individuals with income (including super contributions) exceeding $250,000, an additional 15% tax (Division 293 tax) may apply, making the total tax rate 30% on the amount that exceeds the threshold or the taxable super contributions, whichever is less.

Earnings Tax

Investment earnings within your super fund are also taxed at 15% during the accumulation phase. This applies to interest and dividends minus any tax deductions or credits.

Superannuation Fund Earnings and Growth

When it comes to determining the value of your super, fund earnings and growth play a key role in your calculations.

Investment Returns

Unless instructed by the member, the superannuation contributions by the member is generally invested into a default investment option by the super fund. Many super funds, including Superhero Super, allow you to change your investment options to suit your goals and circumstances. As such, your investment return typically depends on how and where your super is invested.

Types of Investments (Shares, Property, Cash, etc.)

Superannuation fund earnings come from various investment returns on the assets held within the fund. Sources of these earnings can generally include:

• Interest: Earned on fixed-income investments like bonds and term deposits,
• Dividends: Payments received from shares in companies,
• Capital gains: Profits made from selling assets at a higher price than the purchase price,
• Rent: Income from property investments, and
• Other investments: Returns from alternative investments like infrastructure, private equity, and commodities.

Do note that not all superannuation investment options would hold all the above assets.

Risk vs. Return

As with every type of investment, there is a trade-off between risk and reward. Superannuation funds typically offer various investment options, with target performance ranging from conservative to high-growth strategies. Each investment option can affect income and growth potential:

• Conservative options: Generally focus on stable, low-risk investments like cash and fixed-income instruments. This usually leads to lower potential returns, but also reduces risk of loss.
• Balanced or Moderate options: Generally composed of a mix of growth and defensive assets. Balanced investment options would generally have moderate risk profiles, with similarly balanced growth potential.
• Growth options: These would generally have a higher allocation to equities and property, which often have higher potential returns but with increased risk.

Impact of Compound Growth 

Besides the investment strategy, another driver of growth in your superannuation balance is the impact of compounding growth. By reinvesting the investment earnings back into the super fund, your retirement savings can compound, generating additional returns over time. This can help speed up the growth of your superannuation balance over a period of time.

Conclusion

Key Takeaways

Superannuation calculations involve a lot of factors, including but not limited to contributions, tax, investment earnings and fees. Understanding how superannuation is calculated can help you make more informed decisions. 

As always, the above information is not meant to be taken as personal advice. Superannuation calculation can in reality, be a lot more complicated than what is shown above and there may be other factors to take into account. To get information tailored to your personal circumstances, it may be best to seek the advice of a registered accounting professional.

Learn more about what sets Superhero Super apart.

 

¹This article reflects information accurate as of 4 September 2024. For latest information or calculations, including eligibility criteria, refer to the ATO website or consult with a registered accountant.

This information has been prepared by Superhero Super Pty Ltd (ABN 40 667 649 854), a Corporate Authorised Representative (CAR 1306018) of Superhero Securities Limited (ABN 96 160 456 315) (AFSL 430150), and the Promoter of Superhero Super, a sub-plan of OneSuper (ABN 43 905 581 638), issued by Diversa Trustees Limited (ABN 49 006 421 638, AFSL 235153) as Trustee of OneSuper. 

Before making a decision on Superhero Super, please read the Product Disclosure Statements (PDS) and Target Market Determinations, found at superhero.com.au/support/documents. 

Superhero does not provide financial advice that considers your personal objectives, financial situation or particular needs. All investments carry risk so please consider carefully before investing. Past performance is not indicative of future performance. Graphics, charts and graphs provided for illustrative purposes only.