Superannuation and tax

Superannuation, like many things, is taxed in Australia. However, in order to encourage people to retire with more income, the government offers tax concessions on super contributions and earnings in certain circumstances.

In this article we run through when superannuation is and isn’t taxed.

Is Superannuation taxed?

Superannuation is subject to tax in Australia and may be taxed at four stages:

• when contributions enter your account
• on your super investment earnings (the accumulation phase)
• when you withdraw your super benefits
• when you die (super death benefits).

Tax on contributions

What is the tax on contributions that enter my super account?

Tax on pre-tax contributions (concessional contributions)

Contributions made to your super fund from your pre-tax income are generally taxed at a concessional rate of 15%. These contributions include the compulsory Superannuation Guarantee (SG) and any pre-tax contributions you, or your employer makes on your behalf, such as salary sacrifice.

Exceptions

Lower incomes:

If you earn $37,000 or less annually, any tax you pay on your super contributions may be paid back into your super account via the low-income super tax offset (LISTO). See Eligibility for LISTO here.

Higher incomes:

You may be taxed more than 15% on your pre-tax contributions if your income and super contributions combined exceed $250,000. More information can be found on the ATO site, under Additional tax on concessional contributions (Division 293) – for individuals.

Tax if you exceed the concessional contributions cap

If you exceed the cap of $27,500 on pre-tax contributions, any excess is considered to be assessable income, and will be taxed at your marginal tax rate.

If this occurs, the ATO will notify you and you may be able to withdraw up to 85% of the excess contribution. For more information on exceeding the concessional contribution cap, see the ATO page here.

Note, your concessional contributions cap may be higher than $27,500 if you didn’t use your cap in previous years and remaining amounts were carried forward. You also need to have less than a $500,000 super balance. (You can check your annual available concessional contributions cap with the ATO.)

Tax on after-tax contributions

Super contributions from after-tax income aren’t taxed, however earnings on these contributions whilst in your fund are subject to tax. See Tax on super investment earnings.

Tax on superannuation investment earnings

What is the tax on super investment earnings?

Accumulation phase

During the accumulation phase (as you make contributions to your super fund throughout your working life), investment earnings accrued in your fund are generally taxed at 15%, less any permissible tax deductions or credits.

Retirement phase

Investment earnings made in the retirement phase, including capital gains, will not attract tax. (This also applies to those who receive an income stream from super due to permanent incapacity.) Investment earnings made in a transition to retirement pension are taxed at 15% until you turn age 65 or you notify us that you have met another condition of release.

Tax on super withdrawals

Am I taxed when I withdraw my super?

A number of factors determine whether or not you will be taxed on super withdrawals. These include whether or not you’ve reached preservation age, and whether or not the super in your account is tax-free or taxable (often you’ll have a mix of both).

Tax-free and taxable super

You may have super in your account that is tax-free and/or taxable. Any withdrawals must be taken proportionately from your taxable and tax-free components. Your super fund is able to tell you which components of your super fall into which category, but to summarise:

• Tax-free super is made up of non-concessional contributions you made with income you’d already paid tax on (after-tax contributions).Generally you’re not taxed on ‘tax-free’ super, though exceptions apply if certain caps are exceeded or if super is illegally accessed before eligible release.
• Taxable super comes from concessional contributions made with income you had not paid tax on. This includes Super Guarantee (SG) contributions from your employer, and salary sacrifice. If the 15% concessional tax rate was already paid on these contributions (the taxed element of the contribution), and you reach age 60, you generally won’t pay further tax on withdrawals of these components. If you have not reached preservation age, you will pay tax on these components. (Preservation ages can vary according to when you were born, but if you were born 1964 or after, the preservation age is set at 60.) If your preservation age is less than 60, any lump sum withdrawals between preservation age and age 60 are tax-free up to a ’low rate cap.’

Tax on death benefit payments

If you have remaining superannuation when you die, tax may apply to payouts. This will depend on:

• whether or not the payment is paid to your beneficiary as a lump sum or an income stream
• your age when you die, and the age of your beneficiary (in relation to income streams)
• whether or not your beneficiary was your dependant under taxation law
• whether the super is or isn’t taxable, and whether or not your super fund already paid tax on any taxable component.

Tax-free components of super won’t attract tax, whether or not they’re paid out as income streams or in lump sums.

To find out more about how tax would apply to your super in the instance of your death, (and how this would impact your beneficiary), see Super death benefits on the ATO website.

In summary...

If you’re looking to take advantage of tax concessions, it’s worth doing your research and considering financial advice to work out the best plan for you. If you are earning under a certain threshold, putting earnings into super can be a good way of reducing your overall tax.*