Uncovering the mystery of tax on super

Uncovering the mystery of tax on super

The rules regarding super and tax are complex and, for many, the tax paid when putting money into super, its earnings while invested, and when benefits are finally paid can be a mystery. We take a look at how superannuation is taxed.

Uncovering the mystery of super tax

Once invested in the super fund, non-concessional contributions are grouped as the ‘tax-free’ component.

Concessional contributions – which have been taxed at just 15% - form part of the taxable component. The money your super fund earns from your investment is also a part of this taxable component.

So what tax is paid while your super is locked away in the accumulation phase?

Taxation of superannuation investment earnings

  • Superannuation investment earnings attract a maximum tax rate of 15 per cent (usually paid periodically over the year).
  • If assets have been held by the fund for one year or more, only 2/3 of capital gains from the sale of superannuation fund assets are taxed – this means an effective tax rate of 10 per cent.
  • Taxable income of the superannuation fund may be further reduced by capital losses and /or deductible expenses of the fund.
  • However, if super funds are used to start a transition to retirement pension or an account-based pension, investment earnings (including capital gains from selling down fund assets) are tax-free. From 1 July 2017, earnings from transition to retirement will not be tax free.

Taxation of superannuation benefits

Once you are able to access your super, the fund may deduct tax from your payment.

The good news is, tax is only deducted from the taxable component.

How much tax is determined by the reason for payment, the method of payment, and your age. In most cases, the tax rates* are:

Tax age diagram

* Only paid on the 'taxable' component 
** Preservation age is the minimum age, when retired, that a person can access their super. The preservation age changes depending on when a person was born, as shown in the following table:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 to 30 June 1961 56
1 July 1961 to 30 June 1962 57
1 July 1962 to 30 June 1963 58
1 July 1963 to 30 June 1964 59
From 1 July 1964 60

Case study: Investing in superannuation

John earns $90,000 a year (before tax). After taxes and living expenses, he has $10,000 spare to invest. John is trying to decide between investing the surplus money into a high interest savings account or salary sacrificing the amount to superannuation. What are some pros and cons?

High interest savings account Salary sacrifice to superannuation
Pros: Cons: Pros: Cons:

A liquid asset he can access at any time

No tax if withdrawn

Interest would be taxed at his marginal tax rate of 37%

No capital growth

May not keep up with inflation

Saves John 22% in personal income tax (39% including Medicare levy - 15% superannuation contributions tax).

Investment earnings of his superannuation funds are taxed at maximum 15%.

Potential for capital growth

May protect against inflation.

John cannot access his super until he meets a condition of release such as retirement.

Taxes may be deducted when he withdraws the funds, but if he is 60 or older it’s tax-free.

There are contribution limits. Going over these limits will result in extra tax.

This example simply points out the differences between superannuation and another type of investment. To find the best investment options for your retirement dreams, please give us a call.