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 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. 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. If you make super contributions that exceed your contributions cap, then you can expect your super account to be hit with excess contributions tax. 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%.
- When a super fund earns income. During accumulation phase, tax is payable on fund earnings. 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.
- 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.
You may also find useful, my summary table set out below.
|Possible taxes on your super|
|Tax||Tax Rates||What Part of Your Super is Taxed?|
|‘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.|
|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.|
|Benefit Payment Taxes|
|Lump Sums||Between 0% to 30%||Tax payable on ‘taxable component’^ for benefits above low rate cap^^|
|Pensions||Marginal tax rate (MTR) with 15% pension offset for over-55s||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.
^ 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 $175,000 (for 2012/2013 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: DIY Super For Dummies 2nd edition, Trish Power (Wiley) Reproduced with permission.