Superannuation only exists because of how super savings are taxed. Superannuation savings receive tax incentives to encourage Australians to choose super as a retirement savings option. Even so, superannuation is still taxed (for most Australians) at a lower rate of tax than non-superannuation income and savings.
The tax treatment of superannuation can be confusing but in short, your superannuation benefit can be taxed at three stages:
- When making super contributions
- When a super fund earns income
- When receiving super benefits
Contributions tax: when making concessional contributions
Contributions tax of 15% is payable on tax-deductible (concessional) contributions, which includes personal tax-deductible contributions, Superannuation Guarantee contributions and salary-sacrificed contributions.
If you’re an employee, your employer claims a tax deduction for the concessional contributions (namely, for Superannuation Guarantee contributions and salary-sacrificed contributions). Salary sacrificed contributions also reduce an employee’s assessable income for tax purposes.
If you’re self-employed, or substantially not employed, then you can claim a tax deduction for concessional contributions when lodging your income tax return.
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, any individual earning more than $300,000 will be hit with additional contributions tax of 15%, taking the total tax take on concessional super contributions of high-income earners to 30%.
If you make super contributions that exceed your concessional contributions cap, then your super account may be hit with excess contributions tax, or at the very least hit with an interest charge and the hassle of withdrawing your excess contributions from your super fund.
Earnings tax: when super fund earns income
During accumulation phase, earnings tax of 15% is payable on fund earnings. Although capital gains on the sale of a super fund asset are taxed at 10%, if the asset sold by the super fund has been held for more than 12 months. Accumulation phase is the period of time when you’re not taking a pension from your super fund.
No tax is payable on earnings from assets financing an income stream (pension); that is, no tax is payable on a super account’s earnings when a super account is in pension phase.
Note: The federal government has announced that from 1 July 2014, any pension earnings above $100,000 a year will be taxed at 15%. No legislation is in place yet, and the Liberal party has not yet stated their position on this proposed change.
Benefit payments tax: when receiving super benefits
Tax may be payable if you receive a super benefit before the age of 60, or you receive a benefit from an untaxed source (some public sector funds).
The tax-free component of a benefit is always tax-free, regardless of age and regardless of whether the benefit is from a taxed source or untaxed source.
Note: If you die, and your super benefits are left to an individual that is not considered a ‘dependant’ under the tax laws, then tax will be payable on the taxable component of the death benefit. You can find more information on the tax treatment of death benefits in other SuperGuide articles.
You may also find useful, our summary table set out below. For more detailed information on the tax treatment of super benefits:
- withdrawn before the age of 60 see SuperGuide article Retiring before the age of 60: the tax deal
- withdrawn after the age of 60 but from an untaxed source, see SuperGuide article Tax-free for over-60s to stay, except for some
- paid upon your death to family members see Estate planning: Dear Dad, Tax for everything
|Possible taxes on your super|
|Tax||Tax Rates||What Part of Your Super is Taxed?|
|Contributions Taxes (does not apply to ‘untaxed’ schemes)|
|‘Contributions’ Tax*||15%||Tax applies to any before-tax superannuation contributions|
|Additional contributions tax on those earning more than $300,000||15%||Additional tax applies to any before-tax contributions.|
|Earnings Taxes** (in accumulation phase) (does not apply to ‘untaxed’ schemes)|
|Investment Income Tax||15%||Tax on investment earnings|
|Capital Gains Tax (CGT)||15% (effective rate of 10% after CGT discount)||Tax on capital gains in your fund. Effective tax rate of 10% for gains on assets held for more than 12 months.|
|Earnings Taxes** (in pension phase)|
|Investment Income Tax||0%||No tax but proposed 15% tax on pension earnings above $100,000 a year, from 1 July 2014.|
|Capital Gains Tax (CGT)||0%||No tax but proposed 15% tax on pension earnings above $100,000 a year, from 1 July 2014.|
|Benefit Payment Taxes|
|Lump Sums||Between 0% to 15% for most people, and between 0% and 45% for certain long-term public servants||Tax payable on ‘taxable component’^ for benefits above low rate cap^^|
|Pensions||Marginal tax rate (MTR) with 15% pension offset for over-55s for most people, and MTR with no pension offset for certain long-term public servants||Income sourced from ‘taxable component’^^ counted as part of taxable income so subject to MTR.|
|Aged 60 and Over|
|Lump Sums||0% (except some public servants)||Tax-free payment. No tax is payable unless from untaxed source^^^.|
|Pensions||0% (except some public servants)||Tax-free income. No tax is payable unless from untaxed source^^^.|
*Contributions are included in a super fund’s assessable income, which is subject to earnings tax of 15 per cent. In relation to contributions, this tax is commonly known as ‘contributions tax’.
**No tax payable on earnings from pension assets, that is, assets financing a pension/income stream. The federal government has announced that from 1 July 2014, a 15% tax will apply to pension earnings above $100,000 a year. No legislation is in place yet.
^ Superannuation benefits can be made up of two components: taxable component and tax-free component. Tax-free component is always tax-free and taxable component is taxed depending on size of benefit and age of fund member.
^^Taxable component of a lump sum is tax-free up to the low-rate cap of $180,000 (for 2013/2014 year) for benefits from taxed source .
^^^An untaxed source is a super fund that hasn’t paid tax on employer super contributions and super fund earnings. Benefits from an untaxed source are benefits paid from some public sector super funds
Source: Adapted from DIY Super For Dummies 2nd edition, Trish Power (Wiley) Reproduced with permission.
Important: The adapted summary table above is the copyright of Trish Power and SuperGuide holds the exclusive licence to the use of this table (unless otherwise negotiated for specific use by selected organisations). In line with our approach with all SuperGuide articles, any illegal copying or illegal use will be vigorously pursued through legal channels.