Tax & super
How is super taxed?
Your super money is taxed at three stages: when it goes into the fund (contributions), while it is in the fund (investment earnings) and when it leaves the fund (super benefits).
Understanding how your super is taxed can help you benefit from tax concessions and avoid costly mistakes.
1. Tax on contributions
2. Tax on investment earnings
3. Tax on withdrawals
Tax on contributions
Different contributions are taxed at different rates as they enter your super fund.
1. Employer and salary sacrificed contributions are generally taxed at 15%. If you earn $37,000 or less the tax you have paid on your super contributions will be automatically added back into your super account through the Low Income Super Contribution. If your combined income and super contributions exceed $300,000 you will pay additional tax on your super contributions (for more details see ATO: reduced tax concessions for high income earners).
2. Personal after-tax contributions and those received under the government's co-contribution scheme are not taxed.
3. In most cases, when money is transferred from one super fund to another when consolidating or switching funds, no additional tax is payable.
There are limits on how much you can contribute to super and there are penalties for going over these limits. See contributing extra to super.
Tax on investment earnings
Income which is earned in the fund (investment earnings) is taxed at a maximum rate of 15%. Capital gains longer than 12 months within the fund will be taxed at 10%.
The amount of tax your fund will pay will depend on whether the fund has any tax deductions or tax credits. For example, a growth fund may only pay 7% tax because its dividend income entitles it to tax credits.
Tax on withdrawals
When you become eligible to access your super you can take a super income stream to provide you with a regular income, or you can withdraw all or part of your benefit as a lump sum.
Super income streams
The tax treatment of super income streams is covered in detail in retirement income and tax. If you are aged 60 or over your income will usually be tax-free. If you are under age 60 you may pay tax on your super pension.
Lump sum withdrawals
If you are aged 60 or over any withdrawals from a taxed super fund are tax-free. Different rates may apply to untaxed funds, such as government super funds.
If you access your super before age 60 you may pay tax on withdrawals. You can withdraw up to the low rate threshold, currently $195,000, tax-free. This is a lifetime limit and is indexed annually. The threshold does not include the tax-free portion of your super account, which will be returned to you tax-free. Any amounts over the low rate threshold will be taxed at 17% (including Medicare Levy) or your marginal tax rate, whichever is lower.
If you are withdrawing a lump sum from super and are younger than age 55, the lump sum will be taxed at 22% (including Medicare Levy) or your marginal tax rate, whichever is lower. There are limited circumstances under which you can access super before age 55.
While you can access a lump sum this may not necessarily be the best strategy for you. We recommend you seek financial advice before making a decision to withdraw funds from your super.