How Superannuation is Taxed
In many parts of the world, contributions to pension schemes attract no taxation up to certain limits, and indeed tax deductions apply, but any payments received in retirement are entirely taxable at individual's marginal rate. Australia's approach is very different and has added undue complexity. There are three points in time at which superannuation may attract taxation - on contributions, on earnings during the accumulation phase and on payment.
We recommend that individual's obtain specific tax advice before making any significant decisions in relation to superannuation. This includes before making salary sacrifices, establishing a self managed superannuation fund or small APRA fund, commencing a transition to retirement pension (TRIP) or making any lump sum withdrawal.
Tax on Contributions
Employer and salary sacrificed contributions - referred to as "concessional" contributions - are generally taxed at the rate 15%. Two broad exceptions exist:
- If you currently earn $37,000 or less per annum then the tax you have paid on your super contributions will be automatically added back into your super account through the "Low Income Super Tax Offset" (LISTO). The LISTO is 15% of the concessional contributions you or your employer have paid into super up to a maximum of $500 per annum.
- If your combined income and super contributions exceed $250,000 per annum then you will pay additional tax referred to as Division 293 tax. This is an extra 15% tax on the lesser of your concessional contributions or the amount in excess of the $250,000 income threshold.
Note that "non-concessional" (after-tax) contributions and contributions received under the Government's co-contribution scheme are not subject to tax.
Tax on Fund Investment Earnings
Investment earnings within your super fund are taxed at a maximum rate of 15%, with capital gains in relation to assets held for more than 12 months being taxed at 10%.
Note that the actual rate of tax paid on fund earnings can be significantly lower than these figures suggest, as the fund may be able to claim tax deductions or credits. This is particularly in relation to funds with a significant investment in Australian equities which can claim franking credits in relation to dividends received.
Tax on Withdrawals
Pensions and Income Streams
If you are aged 60 or over any super withdrawal will usually be tax-free, although exceptions exist in relation to payments made from "untaxed" funds - usually Federal and State public service funds. If you are aged 55 to 59 at the time of payment you may be liable to pay tax; the tax-free component of your super payment attracts no tax but the taxable component is taxed at your marginal rate less an offset equivalent to 15% of the taxable portion of the payment - contact your tax advisor or super fund for more details.
The position is more complicated with individuals accessing super prior to age 55, on special grounds. If access is a result of permanent disability or terminal illness you will be taxed on the same basis as individuals aged 55 to 59, but if the reasons relate to severe financial hardship or compassionate grounds then the non-taxable component will attract no tax, but the taxable component will be added to your taxable income and taxed at your marginal rate, with no tax offsets.
Lump Sum Withdrawals
As with pension and income streams, if you are aged 60 or over any lump sum withdrawal will usually be tax-free, although exceptions exist in relation to payments made from "untaxed" funds, as above.
If you withdraw a lumpsum after meeting preservation age but before age 60 you may pay tax on withdrawals, but you can withdraw up to the "low rate cap amount", $215,000 in 2020-2021, on a tax-free basis - this is a lifetime limit which is indexed annually. Note that the threshold does not include the tax-free portion of your super account, which would be returned to you tax-free. Any withdrawals exceeding the low rate threshold would be taxed at 17% (15% plus 2% Medicare Levy) or your marginal tax rate, whichever is lower.
If you are withdrawing a lump sum from super before age 55, in special circumstances, the lump sum would be taxed at 22% (including 2% Medicare Levy) or your marginal tax rate, whichever is lower.
This area can be complicated and you should arrange to have calculations made clearly indicating to the tax payable on any income stream or lump sum withdrawals prior to making any decisions.