The best thing about super is the various ways it allows you to reduce tax. One such way is the concessional tax on super earnings.
The reduced rate of tax on superannuation investment earnings, compounded over time, is a no-brainer way of increasing your retirement savings. In fact, forget about offshore Swiss bank accounts, I’m going to show you how you can get tax-free investment earnings right here in Oz!
Tax on Super Earnings
If you have a superannuation accumulation account or a superannuation pension account, your balance is invested and therefore expected to generate investment returns. Even if your total balance is held in cash, it is still technically invested, because the cash account will have an associated interest rate and will pay interest.
If you own investments in your own name, rather than super, the investment earnings, such as rent, dividends, and distributions are added together with all of your other taxable income, such as your salary, and taxed at your marginal tax rate. Even capital gains, resulting from the sale of an investment are taxed at your marginal tax rate.
But what happens when your investments are held within superannuation? How much tax do you pay on super investment earnings?
Well, firstly, the super earnings tax rate is determined by whether your retirement savings are in the super accumulation phase or super pension phase. Once this is determined, you can then apply the appropriate tax rate.
Contrary to common belief, your age is not a factor when calculating tax on superannuation earnings.
Tax On Super Accumulation Phase Earnings
If you have a superannuation accumulation account, which is an account you can make contributions to and are not receiving pension payments from, then the tax rate applied to all income derived from the investments within your accumulation account is 15%.
Income includes interest from bank accounts and term deposits, share dividends, property rent or managed investment distributions.
If you look at the transaction history of your super account, you should identify transactions that are classified as income, distributions, dividends, etc. This is the amount that tax is levied on.
For example, let’s say you receive $10,000 in income distributions from your super accumulation investments throughout the course of a year. This $10,000 would incur 15% ($1,500) income earnings tax and this tax would be deducted from your superannuation member account. However, if you have an Industry Super Fund and have simply chosen one of the investment options from the menu, all taxes will be built into that investment option and effectively shared amongst everyone in that investment option. The investment manager deals with the taxes behind-the-scenes and the unit price of that investment option already has tax reflected. Therefore, you will not usually see the income tax being deducted from your member balance within an Industry Fund.
That covers investment income tax within super. Now for capital gains tax.
If an investment is sold within a superannuation accumulation account and the sale of that asset results in a capital gain (i.e. the investment was sold for a higher value than it was purchased for), the capital gains tax (CGT) will be payable.
CGT is only paid when the investment is sold, at which stage the gain is realised. This is in contrast to an unrealised capital gain, which refers to an investment that has increased in value, but not yet been sold. No tax is payable on unrealised capital gains.
The CGT tax rate that applies to a realised capital gain is 15%. However, if the investment was owned for longer than 12-months prior to being sold, then a 1/3rd CGT discount will apply and the 15% tax rate effectively reduces to 10%.
If an investment is sold and a capital loss is realised within super, that capital loss can be carried-forward, indefinitely, until completely used up by realised capital gains within super.
Again, with most Industry Super Fund accumulation accounts, all the tax is factored into the unit price of the investment option, so you do not see the tax being paid. The downside of this is that you potentially inherit CGT from other members of the fund each time they choose to switch investment options or withdraw their super, because investments need to be sold at those times to fulfil those member’s requests and everyone shares the tax.
This video summarises the tax on superannuation earnings.
Tax On Super Pension Phase Earnings
If you have a transition to retirement (TTR) pension income stream, all investment earnings within the account are taxed identically to tax on earnings within an accumulation account – 15% on income and 15% on realised capital gains, reduced to 10% CGT if the investment sold was owned for longer than 12-months.
For account-based pensions, all investment earnings derived from investments supporting the pension will be received completely tax-free. Further, all realised capital gains will also be received completely tax-free, regardless of the timeframe that the investment was owned for.
Related articles: Tax on Super After 60
Interestingly, once you are eligible, many super funds will often allow you to move from an accumulation account to a pension account without your assets being sold. This could mean that an investment you purchased many years before retirement, with large unrealised capital gains, can be transferred into a pension account (with the same super provider) upon retirement and sold the very next day completely tax-free.
The table below summarises the tax on super earnings.
|Accumulation||TTR Pension||Account-Based Pension|
|CGT on asset owned for <12 months||15%||15%||0%|
|CGT on asset owned for >12 months||10%||10%||0%|
So there you go, I hope you enjoyed this article about tax on superannuation earnings. Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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