Understanding the tax rules can be a challenge. Understanding superannuation rules can be mind-boggling. So, it goes without saying that trying to comprehend super and tax simultaneously can make your head hurt. But let’s begin with a simple one: Does taxable income include super?
This article covers both super contributions and super withdrawals and how tax is applied to both.
Does Taxable Income Include Super Contributions?
Personal taxable income is the amount of income taxed each year at your individual tax rate and will usually include income earned or received.
Examples of taxable income include salary, wages, investment income and certain government payments.
If you are an employee, your employer is required to make mandated employer super contributions into your super account, equal to 10% of your wage. These are known as superannuation guarantee (SG) payments.
So, does your taxable income include the super contributions received from your employer? The answer is no.
The wage you receive into your bank account from your employer will be the amount after pay as you earn (PAYE) tax has been deducted. Your SG contributions on the other hand will be paid directly from your employer into your super fund.
Your employer will not deduct any tax (or allowance for tax) from the amount contributed into your super fund. Furthermore, the amount contributed into super as a SG contribution will be in addition to your salary.
For example, if your wage is $2,000 per week, your employer will need to pay $200 (10%) directly into your super as a SG contribution. The $2,000 will then have PAYE tax deducted from it and the net amount will be paid into your bank account.
To calculate how much super you are entitled to, you should refer to your employment agreement. Some agreements state a salary plus super and some will state a salary including super (i.e. $100,000 plus super OR $110,000 including super).
Are Super Contributions Taxable At All?
Mandatory employer SG contributions paid by your employer into your super account are classified as concessional contributions, because your employer claims a business tax deduction for making the contribution.
All concessional contributions will incur contributions tax of 15%. This tax is usually deducted as soon as the contribution enters your super fund and you should be able to see the contributions tax being deducted on your super fund transaction statement.
If you are a low income earner, you may be eligible to effectively receive a refund of contributions tax in the form of the Low Income Super Tax Offset.
If you are a very high income earner, you may be required to pay an additional 15% contributions tax on all concessional contributions.
The only time that personal taxable income will include superannuation contributions is when you exceed the concessional contribution cap and the excess will be included in your taxable income. In this instance, you will be notified by the ATO and directed as to what to do. You will not need to include this information in your tax return.
Are Salary Sacrifice Contributions Taxable?
Salary sacrificing is the act of forfeiting part of your wage in exchange for equivalent increased super contributions, which reduces your gross income assessed for personal income tax purposes.
Similar to SG contributions, salary sacrifice contributions are paid directly into your super account by your employer. And, because your employer claims a business tax deduction for making salary sacrifice contributions (just as they would your wage), these contributions are classified as concessional contributions. As we know, all concessional contributions incur contributions tax of 15%.
Given that the whole purpose of salary sacrificing part of your wage into super is to reduce your personal income tax, then obviously salary sacrifice contributions are not assessed for tax at your marginal tax rate and no tax is paid by you personally.
Does Taxable Income Include Super Withdrawals?
A superannuation withdrawal can come in the form of a lump sum payment or as an income stream/pension payment.
Superannuation withdrawals do need to be included as income on your tax return. A super withdrawal will consist of tax-free, taxable and/or untaxed elements. Only taxable and untaxed elements need to be included in your tax return.
If you are under age 60, the taxable and untaxed elements will be included as taxable income. If you are aged 60 or over, only untaxed elements will be included as taxable income.
Do You Declare Superannuation on Your Tax Return?
Super contributions do not need to be included as taxable income on your tax return and no tax will be paid by you personally on super contributions; however, there are instances where super contributions need to be included in your tax return for other reasons.
For example, reportable employer contributions and any assessable amounts released from the First Home Super Saver should be included in your tax return.
Reportable employer superannuation contributions are contributions made by your employer into your super fund that are above the mandated SG contributions, including salary sacrifice contributions, but not including non-concessional (after-tax) contributions.
Taxation of Superannuation in Australia
In summary, contributions made to super are not included in taxable income and do not need to be declared on your tax return.
Withdrawals from super generally do need to be included in your tax return, but will usually only be taxable income if you are under age 60.
Concessional (deductible) contributions made into super will incur contributions tax, but this tax is deducted from the contribution amount upon entry to your super fund. It is not paid by you personally.
Once super contributions are added to your superannuation member balance, they will be invested into your preferred super investment option and will therefore have investment earnings. These investment earnings are taxed, but all superannuation earnings tax is paid from your super balance, not by you personally.
Understanding personal income tax and superannuation tax can be complex, so it is often prudent to seek advice from a tax professional, but there are often many ways to optimise your super contributions and manage your super withdrawals, so that minimal or no tax is payable. If you want to learn the dozens of strategies available to you, make sure you check our online platform the SuperGuy HUB.
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