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Superannuation in Australia has its critics for, among other things, its fees, complexity and constant government tinkering with the rules. But even the critics would agree that super remains the most tax-effective investment vehicle for your retirement savings.
And deliberately so. The relatively light taxation of super is the carrot the government uses to encourage Australians to lock their savings away for three decades or more during their working lives. The combination of concessional tax rates, time and compound interest is what makes super such a powerful vehicle to grow your retirement savings.
The system is designed to:
- Have lower (concessional) tax rates for contributions you and your employer make into your super fund and earnings on investments inside your fund
- Generally provide you with tax-free withdrawals in retirement (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 specific circumstances (such as if you face severe financial hardship, become permanently disabled or are diagnosed with a terminal illness).
While the taxation of super is attractive, it is also complex. That’s why it’s generally worthwhile seeking independent professional advice based on your individual superannuation circumstances. However, it’s still important to have a general understanding of how super is taxed in Australia to guide your decision-making and savings strategies. This article explains in broad terms the key principles.
How super is taxed at different stages
There are three stages when super can be taxed:
- On the way in, when your contributions enter your fund
- Inside the fund, on earnings from your investments
- On the way out, 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.
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
|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
Rollovers from other super funds
Tax may be payable if you are moving from an untaxed fund such as 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% in the accumulation phase while you are making contributions to your fund, less any allowable tax deductions or credits, such as franking credits from Australian shares under the dividend imputation system.
Franking credits are for tax a company has already paid. 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 such as 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 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. There are limits to the government’s generosity though, in the form of 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
When the time comes to start drawing down your super, benefits can be paid as a lump sum, an income stream, or a combination of both. 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, withdrawals will usually be tax free.
If you access your super prior to turning 60, the amount of tax you pay will depend on:
- 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
- The components of your payment (that is, 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 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 ($210,000 for 2019-20 rising to $215,000 in 2020-21) 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 is lower.
When you die your super balance will be paid to your nominated beneficiary. The tax payable depends on whether:
- They are a dependant of yours or not
- The death benefit is paid as a lump sum or an income stream
- The benefit contains a taxable component or not.
This article has explained in broad terms how super is taxed in Australia, but it’s worth keeping in mind 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.