How your super is taxed differs depending on your age, contributions and other factors, so it’s important to understand the different tax implications that could apply to your nest egg.
Super can be a tax-effective way of saving for retirement. Generally, money invested in super is taxed at a lower rate than your personal income tax rate. It’s structured in this way to encourage workers to save for their retirement.
The money you invest in super can be taxed at four different stages: when the money goes in (super contributions), while it’s in your super fund (investment earnings), when you withdraw it (super benefits) and when you die (super death benefits).
But the ATO’s tax treatment of your super savings is different at each of these stages. Below we explain the tax implications of each stage.
Tax on super contributions
The amount of tax you'll pay on money going into your fund (super contributions) depends on the type of super contribution and your circumstances. Here are some of the key factors to consider.
How concessional contributions are taxed
Concessional (before tax) super contributions include employer super contributions made on your behalf, any salary sacrifice contributions you make, or any personal contributions that you claim a tax deduction on in your tax return. These contributions are taxed at 15% when they are received by your super fund (up to a cap of $25,000 per year), provided you earn less than $250,000 annually.
How non-concessional contributions are taxed
Non-concessional (after tax) super contributions aren’t subject to tax as they are made with money you’ve already paid tax on (such as a regular salary payment). Types of non-concessional contributions include contributions your spouse makes to your super or personal contributions that you don’t claim as a tax deduction.
How low-income earners are taxed
If you’re a low-income earner (earning up to $37,000 per year), the low-income superannuation tax offset ensures that you don’t pay a higher rate of tax on your super contributions than your income tax rate. The offset will be paid directly to your super account and the payment will be equal to 15% of your concessional contributions for the year, capped at a maximum of $500.
Those who earn between $37,697 and $52,697 during the 2018/2019 financial year may also be eligible for super co-contributions from the government of 50 cents for each dollar, up to a maximum of $1000 in non-concessional (after tax) contributions.
How high-income earners are taxed
If you earn more than $250,000 a year (including super), your concessional contributions are taxed at an additional 15%, bringing the total tax on these contributions to 30%; however, this is still less than your marginal income tax rate of 45%. This extra 15% is known as Division 293 tax. Only the concessional contributions which make your total income exceed $250,000 are subject to the additional tax.
If your concessional contributions exceed the concessional contributions cap of $25,000 per year, the excess is included in your tax return and taxed at your marginal tax rate (less an allowance for the 15% already withheld by your super fund). You can choose to withdraw some of the excess contributions to pay the additional tax.
Tax on super investment earnings
The tax that applies to super investment earnings varies depending on whether your super is in accumulation phase or pension phase
How super investment earnings in accumulation phase are taxed
When you are still working and growing your super, the investment earnings generated by your super are taxed at a maximum rate of 15%. But if the earnings are capital gains from an asset owned through your super for more than 12 months and then sold, the tax on the gain is reduced to 10%.
The amount of tax your fund pays may also be reduced by tax deductions or tax credits that apply to some types of investments.
How super investment earnings in pension phase are taxed
If you’re retired and drawing a retirement income stream from your super, then the investment earnings are exempt from tax, including capital gains, regardless of your age. A limit of $1.6 million (in 2018-19) applies to the amount that you can transfer to the tax-exempt retirement pension phase. This tax exemption on investment earnings also applies if you commenced the income stream due to permanent incapacity.
Tax on super withdrawals
Tax when you withdraw your super as an income stream
If you’ve reached your preservation age, have retired and are aged 60 or over – or if you are aged 65 and over regardless of your work status – you can access your super as an income stream (such as a pension or annuity) tax free. This is known as a ‘retirement phase’ income stream. If you are classified as ‘permanently incapacitated’ you may also be able to access your super as a retirement phase income stream, regardless of your age, but some tax may be payable on the income payments if you are below age 60.
If you’ve reached your preservation age and retired but are under age 60, no tax is payable on the tax-free component of your super (which is made up of your non-concessional contributions and any government co-contributions) but tax is payable on the taxable component of your super (which is made up of your concessional contributions and investment earnings). This taxable component will be added to your income and taxed at your income tax rate less a tax offset equal to 15% of the taxable portion of the payment.
Tax when you take a transition to retirement income stream
Income payments from transition to retirement (TTR) income streams (where you can draw down from your super if you’ve reached preservation age but are still working) are taxed in the same way as other retirement income streams depending on your age, as explained above. The returns on the assets supporting a TTR income stream are taxed at a maximum of 15%, the same as super investment earnings. The earnings on the TTR income stream become tax exempt as explained above when you advise the super fund of your retirement or reach age 65.
Tax when you withdraw your super as a lump sum
If you’ve reached your preservation age, have retired and are aged 60 or over, or if you are aged 65 and over regardless of your work status, you can access your super as a lump sum tax free.
If you’ve reached your preservation age and retired but are under age 60, you can withdraw up to $205,000 tax free in 2018-19 (this is known as the low rate threshold amount). This is a lifetime limit and is adjusted annually to take into account the rising costs of living. The threshold doesn’t include the tax-free portion of your super (which is made up of your non-concessional contributions and any government co-contributions) as you can withdraw these tax free anyway. Any amount you withdraw over the low rate threshold will be taxed at 17% (including the Medicare levy) or your income tax rate, whichever is lower.
Tax when you withdraw your super in other circumstances
Under some limited circumstances, you can withdraw a lump sum from your super before preservation age. In these cases, withdrawals are taxed at 22% (including the Medicare levy) or your income tax rate, whichever is lower.
Tax on super death benefits
Different tax rates apply to super death benefits depending on whether they are paid as a lump sum, income stream (or mixture of both), and if the beneficiary (or beneficiaries) who receive your super death benefits are classified as tax dependants.
Tax dependants include a current or former spouse or defacto, any children you have under age 18 or any other financial dependants. It’s also important to understand that different tax treatments apply to the taxed and untaxed element of your super.
The taxed element refers to the portion of your super death benefit that has been accumulated through concessional contributions and your super investment earnings.
The untaxed element typically refers to a portion of your super death benefit that comes from a life insurance policy held by your super fund, or where the death benefit is being paid from an untaxed super fund, such as certain government sector super funds.
Paying super death benefits as a lump sum
|Type of beneficiary||Tax rate on taxed super element||Tax rate on untaxed super element|
|Non-tax dependant||Maximum tax rate of 15% (plus the Medicare levy)||Maximum tax rate of 30% (plus the Medicare levy)|
Paying super death benefits as an income stream
|Age of beneficiary and deceased at time of death||Tax rate on taxed super element||Tax rate on untaxed super element1|
|Beneficiary is 60 or older or the deceased was 60 or older||Tax free||Your marginal tax rate minus a 10% tax offset|
|Beneficiary is under 60 and the deceased is under 60||Your marginal tax rate minus a 15% tax offset2||Your marginal tax rate|
1 Refers to (unfunded) government/public sector super funds only.
2 When the beneficiary turns age 60 the income stream becomes tax free.
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