What is superannuation, and how is it taxed?

In Plain English

Superannuation is a way to save money for your retirement. During your working life, money is put into a super fund through contributions. This money is then invested, and the earnings also go into your super account. When you retire, you can access this money to live on.

The government encourages people to save for retirement through superannuation by offering tax breaks. Here's how it works:

  1. Contributions Phase: When money goes into your super fund, some contributions are tax deductible, like those made by your employer or personal contributions you claim as a deduction. However, there are limits to how much you can contribute each year and still get these tax benefits. If you go over these limits, you might have to pay extra tax.
  2. Investment Phase: While the money is in your super fund, the earnings from investments are taxed at a lower rate (generally 15%) than your usual income tax rate.
  3. Benefits Phase: When you start taking money out of your super fund in retirement, the tax you pay depends on your age:
    • If you're 60 or older, withdrawals are generally tax-free.
    • If you're between your preservation age (which depends on your birth date) and 59, you may pay some tax, but it's usually at a lower rate.
    • A portion of your super, called the "tax-free component," is always tax-free, no matter your age.

Detailed Explanation

Superannuation in Australia operates under a three-phase structure: contributions, investment, and benefits, each with distinct tax implications, as outlined in the Income Tax Assessment Act 1997.

1. Contributions Phase:

  • Deductible Contributions: Employers can deduct contributions they make for their employees, and individuals can often deduct their own contributions to complying superannuation funds, as per section 280-10 of the Income Tax Assessment Act 1997.
  • Non-Deductible Contributions: Contributions made by others on behalf of an individual, such as a spouse or the government, are generally not deductible, according to section 280-10 of the Income Tax Assessment Act 1997.
  • Contribution Limits: There are limits on the amount of contributions that can receive concessional tax treatment. Exceeding these limits results in the excess being included in the individual's assessable income and may lead to a tax offset. The individual may also be required to release the excess contributions from their superannuation interests, as detailed in section 280-15 of the Income Tax Assessment Act 1997.
  • The Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013 imposes a tax on certain superannuation contributions. The amount of the tax is 15% of a person’s taxable contributions for an income year.

2. Investment Phase:

  • Assessable Income: Contributions that can be deducted are considered assessable income of the superannuation provider, while non-deductible contributions are generally not, as stated in section 280-20 of the Income Tax Assessment Act 1997.
  • Earnings Taxation: Earnings from the investment of superannuation funds are assessable income of the superannuation provider.
  • Concessional Tax Rate: The taxable income of superannuation providers is generally taxed at a concessional rate of 15%, as per section 280-20 of the Income Tax Assessment Act 1997.
  • Exempt Income Streams: Superannuation providers pay no tax on earnings from assets supporting income streams once those streams have commenced, according to section 280-20 of the Income Tax Assessment Act 1997.

3. Benefits Phase:

  • Types of Benefits: Superannuation benefits can be taken as lump sums, income streams (pensions or annuities), or a combination of both, as mentioned in section 280-25 of the Income Tax Assessment Act 1997.
  • Taxation Based on Age: The taxation of superannuation benefits primarily depends on the age of the recipient, as stated in section 280-30 of the Income Tax Assessment Act 1997.
    • Age 60 or Over: Benefits are tax-free if they have already been taxed in the fund (taxed element), as per section 301-10 of the Income Tax Assessment Act 1997. However, elements not previously taxed in the fund (untaxed element) are subject to concessional tax rates.
    • Under 60: Superannuation benefits may receive concessional taxation treatment, but it is less favorable than for those aged 60 and over, as stated in section 280-30 of the Income Tax Assessment Act 1997.
  • Tax-Free Component: A "tax-free component" of superannuation benefits is always paid tax-free, regardless of the recipient's age, as per section 280-30 and 301-15 of the Income Tax Assessment Act 1997.
  • Death Benefits: Additional tax concessions may apply when superannuation benefits are paid after a member's death, as stated in section 280-30 of the Income Tax Assessment Act 1997.
  • Roll-overs: Members can roll over their superannuation benefits from one complying plan to another without generally incurring tax until the benefits are finally drawn down, as per section 280-35 of the Income Tax Assessment Act 1997.
  • The Superannuation (Excess Non-concessional Contributions Tax) Act 2007 imposes a tax on excess non-concessional contributions. The amount of the tax is 47% of a person’s excess non-concessional contributions for a financial year.
  • The Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 imposes excess transfer balance tax. The amount of the excess transfer balance tax is either 30% or 15% of the person’s notional earnings for the excess transfer balance period.