Q: I am trying to understand how my super is taxed and it seems that it is taxed at every turn. Can you please explain when, and how, a super benefit is taxed?
A: If it were not for tax, superannuation wouldn’t exist. You would simply invest in your own name. Superannuation is taxed at lower rates to encourage people to lock their money away for retirement.
Here’s the short story on the tax incentives surrounding superannuation. You receive tax incentives on superannuation at four different stages:
- when you, or your employer, makes concessional (before-tax) contributions
- when you receive a co-contribution. You’re eligible for a co-contribution when you make non-concessional (after-tax) contributions, and your annual earnings are below a certain level of income
- when your super fund earns income
- when you eventually receive your superannuation benefit.
Stage 1: Making concessional (before-tax) contributions
If you are an employee, your employer is required to contribute the equivalent of 9% of your salary to your super fund, known as Superannuation Guarantee contributions. Your employer receives a tax deduction for these contributions and your super fund must deduct 15 per cent tax on each contribution. For example, Hilary earns $55,000 plus 9% super. Each year her employer must make superannuation contributions, at least quarterly, worth an annual total of $4950.
You can also make voluntary superannuation contributions in addition to your employer’s contributions, although if you are over the age of 65, you must satisfy a work test.
You can make concessional (before-tax) contributions to a super fund. Concessional contributions fall into three main categories:
- Superannuation guarantee (SG). An employer’s compulsory contributions to an employee’s super fund. In relatively rare cases, an employer can also choose to make voluntary additional super contributions on behalf of an employee but these extra voluntary contributions are not classified as SG contributions.
- Salary sacrificing for employees. If you can arrange for your employer to direct some of your before-tax salary to superannuation as contributions, your super fund deducts 15 cents in the dollar contributions tax rather than the Government imposing your marginal tax rate on that income, which can be up to 46.5 % (including 1.5 % Medicare levy). This type of arrangement is known as salary sacrificing. The employer will receive a tax deduction for this contribution — your employer would also have received a tax deduction if the contribution amount had been paid as cash salary.
- Tax-deductible contributions for self-employed or non-employed. You can make concessional contributions, more commonly known as tax-deductible contributions, if you are self-employed or not working. You are also eligible to make this type of contribution if you are employed, but you receive less than 10% of your total assessable income plus reportable employer super contributions, plus reportable fringe benefits from an employer. A 15% contributions tax is deducted from any superannuation contribution that has been claimed as a tax deduction.
Stage 2: Making non-concessional (after-tax) contributions
A non-concessional contribution is a superannuation contribution from money from which you have already paid income tax at some point in the past. After-tax contributions are not hit with the 15% tax on contributions when entering a super fund.
If you make a non-concessional contribution, you may be eligible for a tax-free bonus from the government called the co-contribution if your assessable income is under $46,920 for the 2012/2013 year.
Stage 3: Paying less (or no) tax on earnings
The maximum tax that you will pay on your superannuation fund’s earnings is 15 cents in the dollar. A super fund pays tax on its earnings in three different ways:
- Contributions. Believe it or not concessional (before-tax) superannuation contributions are treated as earnings/income of a super fund and subject to a 15% tax. We refer to a ‘contributions’ tax for ease of explanation, but legally this tax is really the same as the tax on a superannuation fund’s income. Since 1 July 2012, if you earn less than $37,000 a year, and you, or your employer makes concessional (before-tax) superannuation contributions on your behalf, then you can expect a refund of the contributions tax deducted from your super account, paid directly to your superannuation account by the Federal Government. Since 1 July 2012, if you earn more than $300,000 a year, your concessional super contributions will be subject to a further 15% tax, taking the total contribution for high-income earners to 30%.
- Earnings. Fund earnings are subject to a maximum of 15% tax. If your super fund owns Australian shares that pay franked dividends, your fund will pay less than 15% tax on its earnings. A franked dividend is a dividend that has pre-paid 30 per cent in company income tax.
- Capital gains. Any capital gains that your superannuation fund makes from the sale of fund assets is subject to earnings tax. If the asset sold has been held for more than 12 months, then the fund only pays tax on two-thirds of the capital gain. In effect, a tax rate of 10%.
Note: The superannuation system is split into two distinct phases:
- Accumulation phase. You are in this phase when you are still contributing to your superannuation fund and/or have not yet withdrawn your super benefit or started an income stream. Your fund pays up to 15% tax on concessional contributions and investment income (and individuals earning more than $300,000 now pay an extra 15% tax on concessional contributions).
- Pension phase. You are in this phase if you have commenced an income stream (pension) from a superannuation fund. Your super fund does not pay tax on investment income from assets that finance an income stream.
Stage 4: Accessing tax-free super benefits
The best news about super and tax is that when you access your super on or after the age of 60, you will receive your super benefits tax-free (with the exception of some public servants). That’s right. No tax for over-60s.