How Does Superannuation Work in Australia? Here’s How It Works

Like most countries in general, Australia has a superannuation system for its workers. The superannuation fund includes employer contributions, personal contributions, as well as contributions from government funds.

The goal is to increase your retirement account balance over a long period of time while you are still working. After reaching retirement age, your superannuation fund savings will be converted into superannuation funds which will provide a steady income for you to live on in your older age.

For this reason, it is a good idea for you to know about how does superannuation work in Australia and enjoy your retirement with complete peace and comfort.

Related: How Tax Works in Australia: Don’t Stress, Be Smart!

How Much Superannuation Do You Get in Australia?

Whether you’re just starting out in the workforce or approaching retirement, knowing how much super you can expect will help you make informed decisions about your financial future.

Employer Contributions

As an employer, you are obliged to pay super guarantee (SG) to eligible employees at least 4 times a year.

The SG rate that must be paid for each employee is 11.5% of their ordinary time earnings (OTE). This will take effect from 1 July 2024 and this rate is scheduled to increase gradually to 12% on July 1, 2025.

You will be penalized for paying the super guarantee if you do not pay the required SG amount by the quarterly due date. To find out how much SG you have to pay, you have to calculate whether you have to pay super.

The super guarantee percentage is the minimum amount regulated and required by law. You can pay SG at a higher rate based on awards or agreements.

Employee Contributions

These fund contributions are taken directly from your personal funds, so it is a good idea for you to prepare and consider making additional personal contributions to your super fund.

Set aside some extra money every month from your net salary and then save it in your super account. You can contribute as much as $100,000 per year and you may claim the full tax deduction for contributions you make until you are 75 years old.

However, if you are under 65 you can apply for additional contributions for the next two years which means you can set aside up to $300,000 depending on your super balance.

You can make an agreement with your salary provider not to pay part of your salary in exchange for benefits provided by your employer of the same value.

Following the written rules regarding how does superannuation work in Australia, super salary contributions taken from salary are not considered employee contributions but are counted as employer super contributions.

Contributions agreed through a salary sacrifice agreement are taxed in the super fund at 15%.

Government Contributions

The government also plays a role in helping to increase your retirement savings. The government increases superannuation funds through joint contributions to superannuation funds and tax reduction incentives for low-income superannuation funds.

If you are eligible and have made personal contributions to your superannuation fund during the year, the Government will also make a contribution of $500.

If you earn $37,000 or less a year you may qualify for a low-income retirement tax deduction of up to $500 which will be paid directly through your retirement account.

This means that most employees or low-income workers will not pay tax on their concession contributions.

To receive the full $500 you must earn no more than $42,016. You can still get some additional contributions if your income is less than $57,016, making a non-concessional contribution of $1000 and not exceeding your non-concessional limit for the year.

You must also be under 71 years of age and have a superannuation balance of less than the general transfer balance limit at the end of the previous financial year.

Contributions Caps

Contributions to superannuation funds in Australia can be concessional (pre-tax) or non-concessional (after tax) and both are subject to certain contribution limits which are usually annual but some are multi-annual.

Since July 1, 2017 there has been a significant change that applies a limit of $1.6 million on the total amount of funds that can be deposited in a retirement income account and earn tax-free income upon retirement.

This regulation is called the transfer balance cap (TBC) and will increase to $1.7 million on July 1, 2021 and to $1.9 million in July 2023.

What are the Rules for Superannuation in Australia?

Before you pay or set aside your money for superannuation fund contributions, it’s a good idea to know the terms or conditions that apply. The terms and conditions are as follows:

• If you are an entrepreneur or employer you need to offer superannuation fund options to eligible employees.
• You are also required to pay superannuation contributions for eligible employees four times a year.
• Pay and report super electronically in a standard format, ensuring you meet SuperStream requirements. You are also required to pay superannuation funds to a compliant superannuation fund.
• Check whether employees are eligible to choose their own superannuation fund.
• Inform employees about the funds established by the employer.
• Provide employee tax file numbers (TFN) to their superannuation fund.
• Request details of superannuation funds captured for employees.
• Pay every super due date.
• Single touch payroll.
• Pay super to yourself as a sole trader or partner.

After receiving your superannuation fund benefits, you can easily decide what you will use your superannuation funds for. Of course, before you receive the financial allowance, you must first fulfill all the applicable terms and conditions set out on how does superannuation work in Australia system.