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
Tip: For a broader explanation of how super works (rather than just the super tax rules), see our summary beginner SuperGuide articles Super for beginners: A starting guide and Superannuation investing: How does it all work?.
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 even as employee, you can claim a tax deduction for concessional contributions when lodging your income tax return. (Note that before July 2017, employees were generally not able to make tax-deductible super contributions unless they satisfied a special 10% income test.) For more information, see SuperGuide article Employees can now make tax-deductible super contributions.
Extra contributions tax for high-income earners: The concessional (before-tax) contributions of Australians earning more than $250,000 will also be hit by additional contributions tax of 15%, taking the total tax take on concessional super contributions of higher-income earners to 30%. This additional 15% tax is known as Division 293 tax. Before July 2017 (and from 1 July 2012), any individual earning more than $300,000 was hit with Division 293 tax. For more information see SuperGuide article Double contributions tax for more high-income earners.
You also need to be aware of two important policies that apply to super contributions:
- Low Income Superannuation Tax Offset: 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 used to be known as the Low Income Super Contribution. Since 1 July 2017, the tax refund has been renamed the Low Income Superannuation Tax Offset. For more information on the LISC see SuperGuide article LISTO: Super tax refund for lower-income earners.
- 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 retirement phase pension from your super account. Typically, Australians have super accounts in accumulation phase while they are working, although since 1 July 2017, transition-to-retirement pensions are also 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 in retirement phase; that is, no tax is payable on a super account’s earnings when a super account is in retirement phase.
Note: Since 1 July 2017, a cap of $1.6 million has been imposed on every Australian, limiting the amount of super that can be transferred into retirement phase (what we previously called pension phase). For more information, see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap.
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 death benefits: Dear Dad, Tax for everything.
For more detailed information on the tax treatment of super benefits:
- withdrawn before the age of 60 see SuperGuide articles Retiring before the age of 60: the tax deal and for summary tax tables, see Super tax tables: When UNDER 60 years of age
- withdrawn on or after the age of 60, see SuperGuide article Tax-free super for over-60s, except for some and for summary tax tables, see Super tax tables: When OVER 60 years of age
- 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 and for summary tax tables, see Super tax tables: When OVER 60 years of age
- paid upon your death to family members, see SuperGuide article Superannuation death benefits: Dear Dad, Tax for everything