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-super 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 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 make super contributions that exceed your contributions cap, then you can expect your super account to be hit with excess contributions tax.
- 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 Taxes | ||
| ‘Contributions’ Tax* | 15% | Tax applies to any before-tax superannuation contributions |
| Earnings Taxes** | ||
| 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 | ||
| Under 60s | ||
| Lump Sums | 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 $165,000 (for 2011/2012 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.
Image by Crystian Cruz
See also
- Super for beginners, part 12: I claimed my super due to hardship. Why do I have to pay tax?
- Super for beginners, part 22: How do you speak ‘superannuation’ (… in 20 words)?
- Super for beginners, part 16: Tax-free twice
- Super for beginners, part 17: Four must-knows about super’s tax rules
- Super for beginners, part 8: What happens to my super benefits when I retire?
