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.
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 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: Happy ending to a horror story.
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 capare 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.
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.
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.
You may also find useful, our summary table set out below. 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
- withdrawn on or after the age of 60, see SuperGuide article Tax-free super for over-60s, except for some
- withdrawn on or after the age of 60 but from an untaxed source, see SuperGuide article Tax-free for over-60s to stay, except for some
- paid upon your death to family members, see SuperGuide article Superannuation after-life: Dear Dad, Tax for everything
|Possible taxes on your super|
|Tax||Tax Rates||What Part of Your Super is Taxed?|
|Contributions Taxes (does not apply to ‘untaxed’ schemes)|
|‘Contributions’ Tax*||15%||Tax applies to any before-tax superannuation contributions|
|Additional contributions tax on Australians earning more than $300,000||15%||Additional Division 293 tax applies to any before-tax contributions.|
|Earnings Taxes** (in accumulation phase) (does not apply to ‘untaxed’ schemes)|
|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.|
|Earnings Taxes** (in pension phase)|
|Investment Income Tax||0%||No tax.|
|Capital Gains Tax (CGT)||0%||No tax.|
|Benefit Payment Taxes|
|Lump Sums||Between 0% to 15% (plus Medicare levy) for most people, and between 0% and 47% (plus Medicare levy) for certain long-term public servants||Tax payable on ‘taxable component’^ for benefits above low rate cap^^|
|Super Pensions||Marginal tax rate (MTR) with 15% pension offset for those who have reached preservation age, and MTR with no pension offset for certain long-term public servants||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. Note that the federal government is planning to introduce a $1.6 million cap on the amount that can be transferred into pension phase, taking effect from 1 July 2017 (see SuperGuide article Burden for retirees: Monitoring $1.6 million transfer balance cap )
^ 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 $195,000 (for 2016/2017 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: Adapted from DIY Super For Dummies 3rd edition, Trish Power (Wiley) Reproduced with permission.
Important: The adapted summary table above is the copyright of Trish Power and SuperGuide holds the exclusive licence to the use of this table (unless otherwise negotiated for specific use by selected organisations). In line with our approach with all SuperGuide articles, any illegal copying or illegal use will be vigorously pursued through legal channels.