Do You Pay Tax On Super?

Like other income, superannuation is also subject to personal income tax, albeit at concessional rates.

Under the superannuation guarantee, employers are required to pay a percentage (currently at 11%) of their worker’s wages into dedicated super accounts.

This falls into the category of income for the worker and is therefore subject to tax. Similarly, when the accumulated balance in the super account generates returns, that income is also subject to tax.

Superannuation is generally taxed at three points in its life cycle:

1. when contributions enter the account. This is at 15%.
2. on investment earnings within the fund.
3. on withdrawals from the account, usually at retirement age.

Contributions

Contributions made into an elected or default super fund, whether by way of compulsory payments by your employer under the Superannuation Guarantee (SG) or for the self-employed as voluntary contributions from your income. You may also elect to receive additional payments from an employer on your behalf such as salary sacrifice, in which you “sacrifice” a certain percentage of your pay into your super fund, beyond the binding 11%. However the contributions arrive in your fund, they are taxed at a concessional rate of 15%.

This ‘contributions tax’ is deducted directly from your super account, and can be found in your super transaction statement.

There are some exceptions to this rule:

1. If you earn $37,000 or less, the tax is paid back into your super account through the low-income super tax offset (LISTO) .
2. If your income and super contributions combined are more than $250,000, you are classified as a ‘high income earner’, and pay an extra 15% as Division 293 tax.
3. If you make contributions beyond the annual concessional limit of $27,500 per year, the excess is taxed at your marginal or highest personal income tax rate.

If you make contributions from your after-tax income or take-home pay, you don’t pay any contributions tax because tax has already been deducted.

Investment Earnings

Investment earnings (such as interest, dividends and rental income) accrued in your fund are generally taxed at 15% less any permissible tax deductions or credits, during the accumulation phase i.e. when you are making contributions during your working life.

Investment earnings made in the retirement phase do not attract any tax.

Withdrawals

Super benefits can be drawn down as a lump sum, an income stream (pension), or a combination of both. This generally only happens once you reach your preservation age and meet a condition of release.

In some cases withdrawals are classified into tax-free and taxable, depending on your contributions. When you make a withdrawal, your fund calculates the total tax payable, based on the proportion of components that make up the total value of your super account.

The amount of tax applied to your withdrawal depends on:

1. your age.
2. whether your withdrawal is taxable or tax-free
3. Whether you opt for a lump sum or income stream

Note: if you are aged over 60, both lump sum and pension withdrawals are generally tax-free.

If you are under 60, lump sum super withdrawals attract no tax on the tax-free portion of your balance. The remaining balance will be taxed at 22%. If you are under 60, super withdrawals in the form of a pension attract no tax on the tax-free portion of your balance. However, the remaining portion will be taxed at your marginal tax rate less a 15% tax offset.

A superannuation pension refers to regular payments in the form of an income stream that come from your accumulated super balance, in your retirement phase. This is different from government payments such as the age pension.

A pension account generally works the same way as your super account, except you can’t add money to the account once it’s been opened.

You start a pension account by moving your accumulated super into it and choose your investment options. Instead of adding money to your account, you’ll receive regular income payments from your retirement savings (i.e. your super). You can also take out larger sums, if needed.

Account-based pensions are the most common type of super pensions, based on generating positive returns from your savings and providing a regular income. Alternatively, you can opt for a lifetime income pension, which gives the security of a regular income for the rest of your life, but is not related to your investment performance and is generally indexed to inflation.

For most people, an income stream from superannuation will be tax-free from the age of 60 onwards.

When a person dies, their super fund will, in most cases, pay their remaining super to the nominated beneficiary. Super paid after a person’s death is called a ‘super death benefit’. When the beneficiary receives this payout, they are liable to pay tax on it.

The tax rate applicable will vary based on whether the recipient is categorised as a ‘dependant’ or ‘non-dependant’ according to the tax laws, and whether the benefit is paid from the tax-free component or the taxable component of the super. The taxable component is further divided into the taxed and untaxed elements.

If the death benefit is paid as a lump sum to a ‘dependent’, it is completely tax-free. However, if the death benefit is paid as a lump sum to a ‘non-dependent’, the taxed element of the super is subject to a maximum rate of 15% tax (plus Medicare levy).

If the death benefit is paid as an income stream or pension to a ‘dependent’, then no tax is applicable to the taxed element, except when both the deceased and dependent were below 60 years, in which case it attracts the marginal tax rate.

Tax is payable on the untaxed element at the recipient’s marginal or highest personal tax rate less a tax offset of 10%. If both the deceased and dependent were below 60 years, it attracts the marginal tax rate.

Death benefit cannot be paid as a pension to a ‘non-dependent’; it must be paid as a lump sum.

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