'The real savings come in retirement,when over-60s are not taxed on super withdrawals.'

'The real savings come in retirement,when over-60s are not taxed on super withdrawals.'

I read that ''an advantage of superannuation is that it is taxed at 15 per cent instead of at your marginal tax rate''. Is this painting a misleadingly rosy picture of this advantage? Is the 15 per cent rate applied to all of the pay-out from superannuation? With non-superannuation pay-outs, the marginal rate applies to only a fraction of the income. The average tax rate for recipients is below the marginal rate, in some extreme circumstances so far below that the average rate could be less than the superannuation overall 15 per cent - or am I missing something? W.A.

Yes, you're missing a lot. Super does provide helpful tax benefits on the way in; also tax benefits that are marginally helpful for low-income earners while the money is in the fund; and then very helpful tax benefits on the way out.

In a nutshell, salary-sacrificed contributions are taxed at 15 per cent on entry, along with the employer's 9 per cent compulsory contribution, plus any personal contributions from self-employed people. All are lumped together as ''concessional contributions''. Since personal tax begins at 19 per cent, plus 1.5 per cent Medicare for anyone earning more than $18,200, most workers are on marginal tax rates higher than the 15 per cent contributions tax and can save on income tax through concessional contributions. People can also benefit by investing ''non-concessional contributions'', which are not taxed on entry but provide no tax deductions.

Money earned in an accumulating super fund is taxed at 15 per cent, reduced by franking credits, expenses, and so forth. That means that funds holding shares paying franked dividends tend to pay a much lower amount of tax. One could supposedly argue against super on the grounds that, while a super fund is nominally taxed at 15 per cent on annual income, individuals don't pay 15 per cent tax on average until they earn more than $40,000 a year. However, at this level, they are in the 32.5 per cent tax bracket, plus Medicare. And so we go back to the first point, and that super provides a tax shelter during one's working life.

The real savings come in retirement, when over-60s are not taxed on super withdrawals, don't have to include super withdrawals in tax returns, and super pensions are not taxed on their income.

 

Sell up, then decide

We are both in our early 50s and have three adult children. One is still a dependent as he is a full-time student, but will finish this year. I recently gave up work to start a business, from which I'm yet to draw a wage, but I will persevere for another 12 months. My husband is on $80,000 a year and lives away (rent free) during the week for work. We are considering selling our home and downsizing from a large house on a very large country block to something more manageable. While we probably need to sell the house we are not sure of the best financial move for us: we have a $340,000 mortgage on a property worth about $420,000. We would like to look at buying an investment property and would be happy to rent for 12 months with the aim of buying another house to live in when we decide whether to move towns or not. We have another $12,000 in personal debts and have a hardship break on our mortgage until January, so need to decide before then. S.K.

If you have a hardship break on your current mortgage and feel you need to sell the property to pay your loan, I don't think you are in a position to buy an investment property, which would likely be negatively geared and thus cost you money.

Since you are not taking a wage, you are better off adopting a short-term move and putting the net proceeds from the sale in a high-yielding bank account for 12 months, with no likely tax liability.

Then see how your business goes. If you get an income, or abandon it and return to outside work, you and your husband will be in a better position to determine what you can afford in the way of a home, which should be your top priority so it can be paid off before retirement.