How is superannuation taxed?

There are three superannuation taxation types:

when it comes into the fund (superannuation contributions),
when it is in the fund (investment earnings) and
when it leaves the fund (superannuation benefits).

You may think that this sounds like a lot of tax, but in many cases, superannuation is still the most tax effective way for wage earners to invest. There are also many rules surrounding these taxes and many factors which will impact the amount of tax you pay.

Tax on superannuation contributions

Your employer and salary sacrifice contributions will generally have contributions tax of 15% deducted as long as your superannuation contributions are below the concessional contribution caps. For most wage earners, this rate is likely to be lower than the marginal tax rates they pay (which may be up to 46.5%).

Personal contributions that you make from your post-tax salary are classified as non-concessional contributions. You do not pay tax on these contributions as long as your contributions are below the non-concessional contribution cap.

Tax on superannuation investment earnings

Income which is earned in the fund (investment earnings) is taxed at a maximum rate of 15%. Compare this to the highest marginal tax rate for investment earnings outside superannuation, which is currently set at 46.5%. The effective rate of tax varies from fund to fund, depending on the level of tax deductions in the fund plus any tax credits available. This may actually result in the tax being lower than 15%.

Tax on superannuation benefits (1)

The amount of tax you pay on your superannuation benefits depends on the type of superannuation benefit, your age and whether you choose to receive your benefits as a lump sum or pension. The amount of tax will also depend on the tax components that make up your benefit.

All superannuation benefits, both lump sum and pension, are not subject to tax if you're age 60 or over (2); but if you access your superannuation funds before age 60, you may have to pay tax, on all or part of your benefit.

There may be tax advantages in rolling your superannuation into a pension, rather than taking it as a lump sum. For more details on the taxation of your superannuation benefit, contact a specialist xLife superannuation adviser today.

(1) There are different arrangements for temporary residents. These superannuation benefits relate to Australian and New Zealand citizens or Australian permanent residents only.

(2) This only applies to taxed funds. Different rates apply to untaxed funds, such as public sector funds.

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February 2010