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Superannuation in Australia is a tax-effective investment vehicle that you can use to provide for your retirement. The system is designed to:
- Have lower (concessional) tax rates for fund contributions and earnings
- Generally provide tax-free withdrawals once you reach your preservation age and meet a condition of release
Super can only be accessed early (i.e. prior to your preservation age) in very specific circumstances (such as if you become permanently disabled or are diagnosed with a terminal illness).
Superannuation tax legislation is complex. It’s worthwhile to seek independent professional advice based on your individual superannuation circumstances. However, it’s also important to have a general understanding of how super is taxed in Australia. This article broadly explains the key principles.
It’s also important to provide your super fund with your tax file number, otherwise your fund is legally obliged to tax your contributions, fund earnings, and potentially withdrawals at the highest marginal tax rate (currently 47%).
How super is taxed at different stages
There are three stages when super can be taxed:
- when your contributions enter your fund,
- when your fund earns investment income, and
- when you withdraw benefits (though these are generally tax-free if you’re over 60).
We’ll now look at each of these stages in turn.
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1. Tax on contributions
Super contributions are generally taxed at the concessional rate of 15%. However, the tax payable depends on the type of contribution you make and the amount you earn, as summarised in the table below.
|Type of contribution||Tax rate||*Exceptions|
|Employer contributions (including superannuation guarantee, salary sacrifice, and any before-tax contributions you make for which you claim a tax deduction)||15% (up to the concessional contributions cap)*||
|After-tax personal contributions (also known as non-concessional contributions) for which you don’t claim a tax deduction, or contributions your spouse makes to your fund||Nil (up to the non-concessional contributions cap and provided you have a total superannuation balance of less than $1.6 million)*||
|Government super co-contributions||Nil||None|
|Rollovers from other super funds||Nil*||Tax may be payable if you are moving from an untaxed fund (e.g. an old public sector fund for government employees)|
Source: The Australian Securities and Investments Commission
2. Tax on fund investment earnings
Your super fund investment earnings (such as interest, dividends and rental income) are generally taxed at 15% when you are in the accumulation phase (i.e. making contributions to your fund), less any allowable tax deductions or credits (e.g. franking credits from Australian shares under the dividend imputation system).
Franking credits are the tax that a company has already paid on a share dividend. Super funds (including self-managed super funds) can use these credits as an offset against their taxable income.
In addition, all Australian super funds are liable to pay capital gains tax on any capital gains made on the sale of capital assets (e.g. shares or property). The capital gain is the difference between the selling price of the asset and its cost base. This gain is taxed at 10% if the asset is held for longer than 12 months. Capital gains made on the sale of assets that are held for less than 12 months are taxed at 15%.
However, if your super is in the retirement phase, there is no tax on your investment earnings. It’s important to understand that there is a transfer balance cap which limits the amount of your funds that can be transferred from the accumulation phase to the retirement phase. This cap is currently $1.6 million.
3. Tax on fund withdrawals
Super benefits can be paid as a lump sum, an income stream, or a combination of both methods. As mentioned earlier in this article, this generally only happens once you have reached your preservation age and met a condition of release. If you’re aged over 60 when you access your super, the benefits you withdraw will usually be tax-free.
If you access your super prior to turning 60, the amount of tax you’ll pay will depend upon:
- whether you have reached your preservation age or not (for example you might be accessing your super early due to satisfying an ATO-approved condition of early release),
- whether you choose to receive your payment as an income stream or lump sum, and
- the components of your payment (i.e. whether it contains a tax-free component, a taxable component, or both).
If you choose to withdraw a super lump sum before you reach your preservation age, it will either be taxed at 22% (including the Medicare levy) or your marginal tax rate, whichever percentage is lower.
If you choose to withdraw a lump sum after reaching your preservation age and prior to turning 60, you can withdraw the taxable component of your super up to the low-rate cap (currently $205,000) tax-free. Any amounts that you withdraw above this cap will be taxed either at 17% (including the Medicare levy) or at your marginal tax rate, whichever percentage is lower.
When you die your super balance will be paid to your nominated beneficiary. The tax payable depends upon:
- whether they are a dependant of yours or not,
- whether the death benefit is paid as a lump sum or an income stream, and
- whether the benefit contains a taxable component or not.
Learn more about superannuation death benefits.
This article has broadly explained how super is taxed in Australia, but it’s important to understand that superannuation tax legislation is complex. You should seek independent professional advice based on your individual superannuation circumstances.
The information contained in this article is general in nature.
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