How to calculate superannuation?

calculate superannuation

Having good pay is important not just for the time when you’re being paid but also for future planning. To form a substantial fund, it is crucial to set apart a value periodically and this requires dedicated effort. But for retirement planning, there are guidelines by the Australian Taxation Office to oversee pension funds. 

Superannuation is the pension program of organisations that ensure retirement benefits for employees. These funds are tax-free and can be availed in full at the time of retirement or period payouts. There are certain considerations on how to calculate superannuation, including the tax incidence depending upon the choice of receipts. Let us see what these are and how to derive the fund value.

What are the eligibility criteria?

To be eligible to be enrolled in a superannuation fund, a person must be over 18 years. Those below this threshold can also get registered if they work for more than 30 hours a week. The employees needed to get $450 before tax for eligibility until now, but this requirement is being lifted from July 2022. 

What is the base pay for calculation?

The salary has various components and the calculation for salary-based compensation uses different values. This brings up the question of what should be the ideal base salary that will be beneficial for the employees. The salary breakup is usually discussed at the time of joining. The employer explains all details of the contract, but joiners should be vigilant.

The fair pay for an employee can be decided based on their calibre, work experience and minimum pay requirements. This is usually based on a fixed rate per time, work or percentage of a parameter. These are the ordinary time earnings (OTE) and do not include the overtime component of the salary for the calculation of superannuation. OTE can be understood as the guaranteed monthly payment of the employees.

How to calculate superannuation?

There are two components to the retirement fund invested every month; one is the employee’s contribution and the other is the employer’s contribution. The employee’s contributions are deductible from the annual taxable income if these are to the tune of 10% of the OTE. Anything beyond that limit will be taxable in the hands of the employee. Total income and contributions exceeding $250,000 attract an additional Division 293 tax of 15%. If the employee contributes from post-tax income, this contribution tax is waived off. 

The employer’s contribution is taxed at 15%, but if the employee’s annual salary does not exceed $37,000, then the tax deducted is refunded by way of low-income super tax offset (LISTO). 

Tax Implications upon retirement.

A defined benefit is usually a safer option for retirement funds as these are less risky and the fund value is disclosed by organisations to ASIC every year. Any shortfall needs to be recouped in favour of the employee’s assured benefits. The preservation age for availing tax-free withdrawal of super is 55 years and the threshold is $225,000. If a person withdraws after reaching preservation age and within the threshold, it is supposed to be tax-free. But before preservation age, withdrawals are taxed at 22%, and if the threshold is breached, the withdrawals are taxed at a lower of 17% or the marginal tax rate.

Summing up.

The receipts from public retirement funds are not as assured as the organisation’s super. So, an employee should be aware of their benefits based upon the discussion above to reap the most upon retirement and not be worried about outliving the funds.


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