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), but 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
1. 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, and additional employer 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. (Note that from 1 July 2017, employees will also be able to make tax-deductible super contributions: see SuperGuide article Employees can make tax-deductible super contributions from July 2017.)
Extra contributions tax for high-income earners: Since 1 July 2012, any individual earning more than $300,000 is hit with additional contributions tax of 15%, taking the total tax take on concessional super contributions of high-income earners to 30%. This additional 15% tax is known as Division 293 tax. From 1 July 2017, the concessional (before-tax) contributions of Australians earning more than $250,000 (rather than just over $300,000) will also be hit by the 15% Division 293 tax. For more information see SuperGuide article Double contributions tax for more high-income earners.
You also need to be aware of 2 important policies that apply to super contributions:
- Low Income Super Contribution:Since the start of the 2012/2013 year, 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 (up to $500) of the contributions tax deducted from your super account, paid directly to your superannuation account by the federal government. This tax-refund to your super account is known as the Low Income Super Contribution. From 1 July 2017, the tax refund will be renamed the Low Income Superannuation Tax Offset. For more information on the LISC see SuperGuide article Super tax refund for lower-income earners available beyond June 2017.
- Excess contributions tax.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. Also, if you make non-concessional (after-tax) contributions, and you exceed the non-concessional cap (or, if under the age of 65, the 3-year bring-forward cap) then you will also have to deal with the excess contributions rules. For more information see SuperGuide article Excess contributions rules: A quick summary.
2. Earnings tax: when super fund earns income
During accumulation phase, earnings tax of 15% is payable on super fund earnings. Note that capital gains on the sale of a super fund asset that has been held for more than 12 months, receives a 33% discount on tax payable, which means capital gains are effectively 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 that you have a super account, when you’re not taking a pension from your super account. Typically, Australians have super accounts in accumulation phase while they are working, although from 1 July 2017, transition-to-retirement pensions will also be treated as being in accumulation phase (see SuperGuide article Less tax, more super? A transition-to-retirement pension is no longer the answer).
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, or from 1 July 2017, what will be known as retirement phase.
3. 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 older 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 (most super funds) or from an untaxed source (some older public sector funds).
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 the SuperGuide article Superannuation after-life: Dear Dad, Tax for everything.
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 from 1 July 2017 (includes summary tax tables)
- withdrawn on or after the age of 60, see SuperGuide article Tax-free super for over-60s, except for some (from 1 July 2017) (includes summary tax tables)
- withdrawn on or after the age of 60 but from an untaxed source, see SuperGuide article Tax-free super for over-60s, except for some (from 1 July 2017) (includes summary tax tables)
- paid upon your death to family members, see SuperGuide article Superannuation after-life: Dear Dad, Tax for everything