Superannuation tax: every stage explained

Tax on super affects each stage of the super journey, from the initial contributions, through to the earnings phase, the final withdrawal of funds, and even after death. These tax implications are influenced by various factors like the type of contribution, age and income level.

Staying informed about super tax implications not only ensures you maximise your retirement benefits but also stay on the good side of the ATO. In this guide, we're going to cover the different types of super contributions and how they're taxed. We'll also look at how this plays out for investment earnings and withdrawals.

This knowledge will empower you to make informed financial decisions, optimising your super for a more secure and comfortable retirement.

In the superannuation system, there are two main types of contributions: concessional and non-concessional, each with distinct tax treatments. In this section, we’ll delve into the specifics of these contributions, exploring their characteristics, tax advantages and important considerations.

Concessional contributions

Concessional contributions are contributions made into your super fund that are taxed at a concessional (lower) rate. These can can take the form of pre-tax super contributions or post-tax super contributions and include:

• Employer contributions. Mandatory contributions made by employers, known as the Superannuation Guarantee. They’re taxed at 15% once they hit your super fund.
• Salary sacrificed contributions. Voluntary contributions made by forgoing a portion of your pre-tax salary. These are also taxed at 15% once they hit your fund.
• Personal concessional contributions. Contributions you make from after-tax income and claim as a super contribution tax deduction. Once claimed as a tax deduction, they’ll be taxed at 15% in the fund.

The tax benefits of concessional contributions include paying only 15% tax on this income, and reducing the rest of taxable income, potentially putting you in a lower tax bracket. Keep in mind that the cap for concessional contributions is $30,000 per financial year. 

Contributions exceeding this cap are taxed at a higher rate.

Special tax considerations on concessional contributions

Special tax considerations apply to concessional contributions, particularly for individuals at opposite ends of the income spectrum. Understanding these can help ensure you're taking full advantage of superannuation benefits while staying compliant with tax laws. Here's a brief overview:

• Low-income super tax offset (LISTO). This offset is a boon for low-income earners. If your income falls below a certain threshold, LISTO effectively refunds the tax paid on concessional contributions up to $500. It's a measure aimed at bolstering the super savings of those with lower incomes.
• Division 293 tax. For high-income earners, an additional tax is levied on concessional contributions. If your income is above $250,000, an extra 15% tax is applied to these contributions. This rule is in place to ensure equity in the tax benefits provided through superannuation.

By understanding these categories and their respective rules, you can better plan your super contributions to optimise your retirement savings and tax benefits.

Claiming a tax deduction on personal super contributions

Personal concessional contributions are those made from your after-tax income and are eligible for tax deductions under certain conditions. To claim a deduction, you must notify your super fund with a 'Notice of Intent to Claim' form and receive an acknowledgment.

When you claim this deduction, your contribution is treated as a concessional contribution and is taxed at 15% within your super fund, while also potentially putting you into a lower tax bracket and lowering your personal income tax.

However, it's important to note that this counts towards your annual concessional contribution cap of $27,500. It gets a little more complicated when we're talking about any contribution exceeding this cap, but at the end of the day, anything over $27,500 will be effectively taxed at your marginal tax rate when it's all said and done. Always ensure proper timing and documentation for your claims, and consider seeking professional advice to navigate these tax rules effectively.

Non-Concessional Contributions

Non-concessional contributions are typically after-tax super contributions and therefore don't attract tax when deposited into your super fund. The main types of non-concessional contributions include:

• Personal non-concessional contributions. These are contributions made from your own funds after you have paid income tax. These after-tax super contributions are not claimed as a tax deduction.
• Spouse contributions. Contributions made by your spouse to your super fund. These do not include contributions from a spouse who is contributing as an employer or in cases where you're separated.
• Excess concessional contributions. If your concessional contributions exceed the annual cap and you don't withdraw the excess, they're counted as non-concessional contributions.

In addition to these primary types, there are a few other niche cases of non-concessional contributions. 

The annual cap for non-concessional contributions is $120,000, with the possibility of bringing forward up to $360,000 under certain conditions. It's important to be aware of these types and their limits to effectively manage your superannuation and plan for retirement.

Concessional vs. Non-Concessional Contributions Comparison Table

During the earnings phase of superannuation, which is the period when your contributions are invested and earning returns, the taxation is generally favourable compared to standard investment accounts outside super. 

Here's what you need to know about tax on super earnings:

• Tax on investment earnings. Earnings such as interest, dividends and capital gains within a super fund are taxed at a maximum rate of 15%, which is lower than typical personal income tax rates. This tax is managed and deducted directly by the fund, so individual members don't need to worry about calculating or paying it themselves.
• Capital gains discount. Assets held for over 12 months in the super fund are eligible for a one-third discount on capital gains tax, effectively reducing this rate to 10% for these investments.
• Franking credits. Dividends from Australian companies often come with franking credits, which can be used to reduce the tax liability of the fund.

Tax Treatment During the Accumulation Phase

In the retirement phase of superannuation, tax treatments vary depending on your age and how you access your funds. This phase is critical because it determines how much of your retirement savings you actually get to use.

For Members Over Age 60

Once you're over 60, the tax scenario becomes more favourable. Both pension income streams and lump sum withdrawals from your super fund are generally tax-free. This tax benefit makes superannuation a highly efficient source of retirement income.

For Members Between Preservation Age and 60

If you access your superannuation between your preservation age (which varies between 55 and 60, depending on your date of birth) and 60, the taxation is a bit more complex:

• Pension income streams. The income you receive is subject to income tax, but you're entitled to a 15% tax offset on the taxable portion. This can significantly reduce the amount of tax you pay.
• Lump sum withdrawals. The taxation of lump sum withdrawals depends on the composition of your super - the tax-free and taxable components. The tax-free part remains untaxed, while the taxable component might incur taxes, depending on the total amount and your specific circumstances.

Special Note on Untaxed Super Funds

Some super funds, such as specific public sector funds, may follow different tax rules. Withdrawals from these funds might be subject to taxation even after age 60. It's important to be aware of the nature of your fund and the applicable tax rules.

Tax Treatment in Retirement Phase: Age-Based Comparison

Key Takeaway

Navigating the tax implications in the retirement phase requires a good understanding of your fund's structure and your personal circumstances. Planning your withdrawals and pension income strategically can significantly impact the tax efficiency of your retirement income. 

As always, seeking personalised advice from a financial advisor is recommended, especially if your situation involves complex factors such as untaxed funds or early access to superannuation.

When a member of a super fund passes away, their super balance, including any life insurance within the fund, is paid out as a death benefit. This payment can be made to either dependents, like a spouse or children, or non-dependents.

Tax on super death benefits plays a major role in estate planning. This section clarifies how these benefits are taxed upon being transferred to beneficiaries.

Components of a Superannuation Death Benefit

Superannuation death benefits comprise two components:

• Tax-free component. This part consists of non-concessional (after-tax) contributions. It is always tax-free, irrespective of the recipient.
• Taxable component. This part is made up of concessional (pre-tax) contributions and earnings. Its tax treatment varies based on whether the beneficiary is a dependent or a non-dependent.

These are treated differently depending on who inherits the money. For dependents, the tax-free component remains tax-free, while the taxable component is also tax-free, regardless of whether it's from a taxed or untaxed source within the fund.

For non-dependents receiving superannuation death benefits, the tax-free component remains tax-free. This part includes contributions made with after-tax income. The taxable component is split into two parts:

• The portion from concessional (pre-tax) contributions, which were already taxed at 15% when contributed to the fund, is subject to up to 15% tax plus the Medicare levy.
• The earnings portion, which represents investment growth and hasn't been taxed yet, can be taxed at up to 30% plus the Medicare levy.

Tax Treatment for Super Death Benefits: Dependents vs. Non-Dependents

Payout Options: Lump Sum or Income Stream

The manner in which death benefits are paid (either as a lump sum or as an ongoing income stream) can influence the tax treatment, especially considering the ages of the deceased and the beneficiary at the time of death.

Importance of Estate Planning

Regularly updating beneficiary nominations is crucial for aligning your superannuation with your estate planning objectives. Given the complexities, especially for non-dependent beneficiaries, professional advice is highly recommended.

Understanding superannuation taxes is a vital part of planning for retirement. Mozo’s superannuation guides are a great resource, offering clear and detailed insights to help you make informed decisions about your retirement finances.

Remember, this article is here to inform and guide you, but it’s not a stand-in for personalised tax advice. It's wise to consult with the appropriate government or statutory authorities, or to seek advice from a qualified and registered professional adviser. They can provide guidance that's specifically tailored to your individual financial situation.