In Australia, there are taxes on super contributions, tax on super investment earnings and tax on super withdrawals; yet, superannuation remains a tax-effective vehicle for saving towards retirement.
Let’s take a look at each of the types of taxes and tax rates.
Tax On Superannuation
Understanding how superannuation is taxed, as well as the superannuation tax rates, allows you to optimise your strategy towards retirement.
By minimising tax in the lead-up to retirement, the compounded investment earnings on these tax savings can provide you with significantly more in retirement.
There’s three stages of superannuation where super tax may be incurred:
- Contributions stage (superannuation contributions tax)
- Earnings stage (superannuation earnings tax)
- Withdrawal stage (superannuation withdrawal tax)
Superannuation Contributions Tax
The two types of super contribution categories include non-concessional contributions and concessional contributions.
Non-Concessional Contributions Tax
Non-concessional contributions are after-tax contributions made to super where you have not claimed a tax deduction for making the contribution.
All non-concessional contributions will enter superannuation completely tax-free – no tax is payable.
Concessional Contributions Tax
Concessional contributions are contributions made to super where the contribution has claimed a tax deduction for the contribution, such as employer superannuation guarantee contributions, salary sacrifice contributions and personal concessional contributions.
All concessional contributions are taxed at a tax rate of 15% upon entry to your super fund. Up to an additional 15% contributions tax (total 30%) is payable by very high-income earners. This contribution tax is deducted from your contribution by your super fund and the after-tax amount is allocated to your member balance.
Superannuation Earnings Tax
All earnings derived from investments within a superannuation accumulation account or transition to retirement (TTR) account are assessed for tax.
The tax rate applied to income (i.e. interest, dividends, distributions, etc.) are taxed at a rate of 15%. The tax rate applied to realised capital gains (i.e. profit made from the sale of an investment) is taxed at a rate of 15% in the year the investment is sold. However, if the investment sold was owned for longer than 12 months, a ⅓rd capital gains tax (CGT) discount is applied, effectively reducing the CGT rate to 10%.
If you hold your retirement savings in an account-based pension, the balance will be invested and all earnings derived from investments supporting the pension will be received completely tax-free, including any realised capital gains.
Superannuation Withdrawal Tax
Superannuation withdrawal tax is determined by your age, the circumstances, the type of withdrawal and your superannuation tax components.
All withdrawals, payments and pension income from super must be paid proportionately from each tax component. The tax components include the tax-free component and the taxable component.
Oversimplified, the tax-free component consists of all the non-concessional contributions made to your super account throughout your life and the remainder is the taxable component.
Lump Sum Withdrawal Tax
When you make a lump sum withdrawal from super while under age 60, the tax-free portion is received tax-free, as is the taxable component up to the lifetime low-rate cap. Any taxable portion over the low-rate lifetime cap is assessed for tax.
Lump sum withdrawals from super when aged 60 or over are received tax-free, regardless of the tax components.
If your balance includes an uncommon taxable (untaxed) component, tax may be payable on withdrawals, even if you are over age 60.
Tax on Pension Income
While under age 60, the tax-free component portion of pension income is received tax-free, while the taxable component portion of pension income is assessed for tax. A 15% rebate on the taxable portion is received if you are over your preservation age.
When over age 60, all pension income is received tax free, regardless of components (unless your balance includes a taxable (untaxed) component).
Superannuation Death Benefits Tax
If you pass away and your super is paid as a lump sum to a tax dependant, such as a spouse or child under 18, it will be received by them completely tax free.
If your super is paid as a lump sum to a non-tax dependant, such as a child over 18, tax will be payable on the taxable component by them.
If your super is paid to a beneficiary as an income stream upon your death, the tax payable by the recipient will be determined by:
- The type of dependant;
- The tax components; and
- Your age and the beneficiaries age.
The information above is a wrap-up of all of the types of taxes you pay in your super in Australia and the associated tax rates.
Thankfully, there are numerous strategies available to you to reduce your personal income tax by utilising super, minimising contributions tax, managing earnings tax and eliminating death benefits tax.
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