In this guide
Superannuation in Australia has its critics for, among other things, its fees, complexity and constant government tinkering with the rules. Yet even the critics would agree that super remains the most tax-effective investment vehicle for your retirement savings.
And deliberately so. The relatively light taxation of super is the carrot the government uses to encourage Australians to lock their savings away for three decades or more during their working lives. The combination of concessional tax rates, time and compound interest is what makes super such a powerful vehicle to grow your retirement savings.
The system is designed to:
- Have lower (concessional) tax rates for contributions you and your employer make into your super fund and earnings on investments inside your fund
- Generally provide you with tax-free withdrawals in retirement (once you reach your preservation age and meet a condition of release).
Super can only be accessed early (prior to your preservation age) in specific circumstances (such as if you face severe financial hardship, become permanently disabled or are diagnosed with a terminal illness).
While the taxation of super is attractive, it is also complex. That’s why it’s generally worthwhile seeking independent professional advice based on your personal circumstances. However, it’s still important to have a general understanding of how super is taxed in Australia to guide your decision-making and savings strategies. This article explains in broad terms the key principles.
How super is taxed at different stages
There are three stages when super can be taxed:
- On the way in, when your contributions enter your fund.
- Inside the fund, on earnings from your investments.
- On the way out, when you withdraw benefits (though these are generally tax free if you’re over 60).
1. Tax on superannuation contributions
Concessional superannuation contributions are generally taxed at the rate of 15% while non-concessional contributions are not taxed. However, the tax payable depends on the type of contribution you make and the amount you earn, as summarised in the table below.
| Type of contribution | Tax rate | Exceptions |
|---|---|---|
| Concessional contributions (including superannuation guarantee (SG), salary sacrifice and any personal contributions you make for which you claim a tax deduction) | 15% (up to the general concessional contributions cap) | If you exceed the concessional contributions cap (currently $30,000 per financial year), your excess contributions are added to your taxable income (unless your total super balance was less than $500,000 on the prior 30 June and you have unused cap space from prior years to carry forward). If the excess contributions are added to your taxable income, you’ll pay tax on them at your marginal rate, less a 15% rebate for the contributions tax already paid. If your taxable income is less than $37,000, some of your contributions tax is refunded back to your super account under the low-income super tax offset (LISTO) scheme. If your combined taxable income and concessional super contributions in a financial year exceed $250,000, you’ll also be liable for Division 293 tax in addition to the usual 15% contributions tax. The tax payable (also 15%) is levied on the excess over this $250,000 threshold, or on the super contributions, whichever is less. |
| After-tax personal contributions (also known as non-concessional contributions) for which you don’t claim a tax deduction, or contributions your spouse makes to your fund | Nil (up to the general non-concessional contributions cap and provided you have a total super balance of less than $1.9 million on 30 June prior to the start of the financial year) | There is a general non-concessional contributions cap of $120,000 a year. If your non-concessional contributions exceed this cap (unless you are using the bring-forward rule that allows you to contribute up to $360,000 by bringing forward the following two years’ contributions), you can choose to withdraw the excess contributions and 85% of any associated earnings. The earnings will be added to your taxable income and taxed at your marginal rate, less a 15% tax offset. If you don’t withdraw the contributions, the excessive amount will be taxed at the top marginal rate of 45% plus Medicare levy. If you have a total super balance greater than $1.9 million on the prior 30 June, your non-concessional cap is zero. Any non-concessional contributions you do make will be excess contributions as per the above. |
| Government super co-contributions | Nil | None |
| Rollovers from other super funds | Nil | Tax may be payable if you are moving from an untaxed fund such as some of the old public sector funds for government employees. |
2. Tax on super fund investment earnings
Your super fund investment earnings (such as interest, dividends and rental income) are generally taxed at 15% in the accumulation phase while you are making contributions to your fund, less any allowable tax deductions or credits, such as franking credits from Australian shares under the dividend imputation system.
Franking credits are for tax a company has already paid. Super funds (including self-managed super funds) can use these credits as an offset against their taxable income.
In addition, all Australian super funds are liable to pay capital gains tax on any capital gains made on the sale of capital assets such as shares or property. The capital gain is the difference between the selling price of the asset and its cost base. This gain is taxed at 10% if the asset is held for longer than 12 months. Capital gains made on the sale of assets held for less than 12 months are taxed at 15%.
A new tax has been proposed that will apply to the earnings of super balances above $3 million.
3. Tax on accessing your super
When the time comes to start drawing down your super, benefits can be paid as a lump sum, an income stream or a combination of both. As mentioned earlier in this article, this generally only happens once you reach your preservation age and meet a condition of release. On 1 July 2024, preservation age reached 60. When you are aged over 60, withdrawals are generally tax free.
If you access your super prior to turning 60, the amount of tax you pay will depend on:
- Whether you choose to receive your payment as an income stream or lump sum
- The components of your payment (that is, whether it contains a tax-free component, a taxable component or both).
Withdrawing super before age 60 is possible only if you have some non-preserved super or meet a special condition of release such as terminal illness, permanent incapacity, financial hardship or release on compassionate grounds.
Payments for terminal illness are tax free no matter your age.
The tax treatment for other payment types varies.
When you die your super balance will be paid to your nominated beneficiary. The tax payable depends on whether:
- They are a dependant of yours or not
- The death benefit is paid as a lump sum or an income stream
- The benefit contains a taxable component or not.
The bottom line
This article has explained in broad terms how super is taxed in Australia, but it’s worth keeping in mind that super tax legislation is complex. You should seek independent professional advice based on your personal circumstances.
The information contained in this article is general in nature.
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