There are a variety of taxes that apply to superannuation. These taxes apply in many different situations and at differing rates.
This article attempts to provide you with a brief description of each tax and how it may apply.
The main idea of superannuation is to provide a tax-effective means for saving towards retirement. The tax benefits are the incentives that the Government provides for ‘locking your savings away’ until you are retired. Therefore, it is important to understand the tax associated with superannuation before you commit your funds to it.
Detailed below is an overview of the types of taxes you will encounter within super and how they will affect your retirement benefits.
Tax on Superannuation – Contributions Tax
– Personal Deductible Contributions (Self-Employed)
The rate of Contributions Tax in Superannuation is generally 15% for those earning less than $300,000 p.a. I say generally because all contributions are included in the assessable income of a superannuation fund and taxed at the Income Tax rate of 15%. In industry and retail superannuation accounts, a flat 15% rate is applied. However, in a Self Managed Superannuation Fund (SMSF), franking credits and other tax offsets and deductions can reduce the effective Income Tax rate and consequently the Contributions Tax rate.
The rate of Contributions Tax for those earning more than $300,000, an additional 15% Contributions Tax (total 30%) is applied under the Division 293 provisions. Click here to read more.
Non-Concessional Contributions (contributions made with after-tax dollars) do not incur Contributions Tax.
Click here to read more about the difference between Concessional and Non Concessional Contributions.
The Medicare Levy does not apply to Contributions Tax.
With industry and retail accounts, Contributions Tax is usually deducted when the contribution is made.
With SMSFs, contributions are bundled together with other income of the Fund and tax is applied when the SMSF Financials and Tax Returns are done at the end of each financial year.
The Income Tax on superannuation earnings in ‘Accumulation Phase’ is 15%.
The Income Tax on superannuation earnings in ‘Pension Phase’ is 0%. However, from 1 July 2017, this will not apply to TTR Pensions. Click here to read more.
Capital Gains Tax on Superannuation
The Capital Gains Tax rate on earnings within superannuation ‘Accumulation Phase’ is 15%. However, if the capital gain eventuated from the sale of an asset that was owned for longer than 12 months, the capital gain is reduced by 1/3rd – effectively down to 10%.
The Capital Gains Tax on superannuation earnings in ‘Pension Phase’ is 0% (except for TTR Pensions).
Excess Concessional Contributions Tax
Concessional Contributions made in excess of the cap will incur Excess Contributions Tax at the member’s Marginal Tax Rate. This is because the excess is included in the member’s assessable income. However an addition Excess Concessional Contribution Charge will apply.
Excess Non-Concessional Contributions Tax
Non-Concessional Contributions made in excess of the cap may incur Excess Contributions Tax of 46.5% on the excess, but will more likely be able to be withdrawn and simply have tax paid on the notional earnings during the period when the excess contributions were in the tax effective superannuation environment.
Tax on Superannuation – Account Based Pensions
Your member balance consists of a Taxable component and a Tax-Exempt (AKA Tax-Free) component. If you are receiving a payment from a superannuation income stream, each payment is paid proportionately from each component.
If you are aged between your preservation age and age 59, the Taxable portion of the payment is taxed at your Marginal Tax Rate. However, you receive a tax rebate equal to 15% of the Taxable portion payment. The Tax-Exempt portion of the payment will be received tax free. The rebate may be reduced if your Taxable component includes and Untaxed element.
For example if you received a $5,000 payment for the month and your pension account balance was 80% Taxable and 20% Tax-Exempt, $4,000 (80%) would be taxed at your MTR. However you would receive a tax rebate of $600 ($4,000 x 15%). The remaining $1,000 (20%) would be received tax free.
If you are 60 years or over, all payments – irrelevant of components – will be received tax free (except for the Taxable (untaxed) Component which is taxed at MTR, less 10% offset).
Tax on Superannuation – Lump Sum Withdrawals
Between age 55-59 the first $195,000 (low rate cap) withdrawn from the Taxable (Taxed) Component is received tax-free. This is a lifetime cap and is indexed, which means that lump sum withdrawals from previous years will reduce the low rate cap accordingly. It also means that withdrawals in this year will reduce the future low rate cap accordingly. Lump sum withdrawals made from the Tax-Exempt component are received tax free. You are unable to pick and choose which component the withdrawal comes from. All withdrawals will be proportionate.
If you are over aged 60, all lump sum withdrawals are received tax free, except for the taxable (untaxed) component. Read here for more.
For the purposes of the information below;
A Dependant is:
- The deceased’s spouse or former spouse
- A child of the deceased who is aged less than 18
- Any other person that the deceased had an interdependency relationship with just prior to his or her death
- Any other person who was a dependent of the deceased just prior to his or her death
Tax on Superannuation – Lump Sum Death Benefits
A Lump Sum Death Benefit paid to a dependent is received tax free.
The Taxable Component (untaxed) of a Lump Sum Death Benefit paid to a non-dependent is taxed at 30% (plus Medicare, where applicable)
The Taxable Component (taxed) of a Lump Sum Death Benefit paid to a non-dependent is taxed at 15% (plus Medicare, where applicable)
The Tax-Exempt Component of a Lump Sum Death Benefit paid to a non-dependent is received tax free.
Tax on Superannuation – Income Stream Death Benefits
If the deceased was aged 60 or over when they passed or if the recipient is 60 or over, the Taxable (Untaxed) component of payments will be taxed at the recipients Marginal Tax Rate (MTR), less a 10% rebate. The Taxable (taxed) component and the Tax-Free component of payments will be received tax free.
If both the deceased and the recipient are under age 60, the Taxable (Taxed) component will be taxed at the recipients Marginal Tax Rate with a 15% rebate. The Taxable (Untaxed) component will be taxed at the recipients Marginal Tax Rate. The Tax-Free component of payments will be received tax free.
NON DEPENDENT RECIPIENT
Death benefits are unable to be paid to non-dependents as income streams (as of 1 July 2007). Death benefit income streams that commenced prior to 1 July 2007 are taxed in the same manner as if they were paid to a dependent.