Put savings in Shares or Superannuation

Question

I am 25 and live in Australia. As such my employer must pay 9.5% of my wage into a superannuation retirement account. I have and continue to save and currently have 18k in a savings account earning low interest (2-3%). For any additional savings, I want to invest it into shares, as I currently don't have enough to get into a property.

Is there any point in putting money into superannuation at this point? I am aware that pre-tax contributions (also known as salary sacrificing) are taxed at a discounted rate of 15%. Can someone please explain the advantage of that using math/an example? I can't seem to understand why that's a discount as opposed to not making salary sacrifice and using the money elsewhere.

Is there a point in salary sacrificing as opposed to using that money to buy shares?

Answer 1

It you salary sacrifice or claim a deduction on personal contributions, you will pay less tax for every dollar if you are in the 19% tax bracket or a higher tax bracket (as the tax on the contributions is only 15%). So the higher your income, the higher the tax bracket you will be in and the bigger the savings from any addition super contributions you make.

What you also need to remember is that any income earned in the super fund is also taxed at a maximum of 15%, compared to up to 45% outside of super. This means that any capital gains (held for less than 12 months) and any dividend income will be taxed at up to 45% outside of super.

One thing you can do, but probably not until your capital inside super is at least $150k or the proportion of fees will be too high as a percentage of your capital, is open a SMSF, where you are able to invest directly into shares (or property) and reap the reward of the lower tax rate inside super. However, if you plan to open a SMSF and just buy managed funds in there, you are better off just staying with your current fund.

Answer 2

Say you are earning $50 000 per year (before tax). By salary sacrificing $5 000, your taxable income is reduced to $45 000. This reduces the income tax you pay by 0.325 x $5000 = $1625 (since you pay 32.5c in income tax on every dollar you earn between $37000 and $90000). The tax on the $5000 going into your superannuation is 0.15 x $5000 = $750, saving you $875 in tax.

One advantage of investing in shares directly (outside of superannuation) is that you have greater control over where you invest your money, and you can sell the shares whenever you want (whereas sacrificing into superannuation locks the money away until you are at least 60).