Superannuation in Australia has its critics for, among other things, its fees, complexity, and constant government tinkering with the rules. But even the critics would agree that super remains the most tax-effective investment vehicle for your retirement savings.
The system is designed to:
- Have lower (concessional) tax rates for contributions you and your employer make into your super fund and earnings on investments inside your fund.
- Generally, provide you with tax-free withdrawals in retirement (once you reach your preservation age and meet a condition of release).
- Super can only be accessed early (i.e., prior to your preservation age) in specific circumstances (such as if you face severe financial hardship, become permanently disabled, or are diagnosed with a terminal illness).
While the taxation of super is attractive, it is also complex. That is why it is generally worthwhile seeking independent professional advice based on your individual superannuation circumstances. However, it is still important to have a general understanding of how super is taxed in Australia to guide your decision-making.
There are three stages when super can be taxed:
1. On the way in when your contributions enter your fund.
Super contributions are generally taxed at the concessional rate of 15%. However, the tax payable depends on the type of contribution you make and the amount you earn.
2. Inside the fund, on earnings from your investments.
Your super fund investment earnings (such as interest, dividends, and rental income) are generally taxed at 15% in the accumulation phase while you are making contributions to your fund, less any allowable tax deductions or credits, such as franking credits from Australian shares under the dividend imputation system.
Franking credits are for tax a company has already paid. Super funds (including self-managed super funds) can use these credits as an offset against their taxable income.
In addition, all Australian super funds are liable to pay capital gains tax on any capital gains made on the sale of capital assets such as shares or property. The capital gain is the difference between the selling price of the asset and its cost base. This gain is taxed at 10% if the asset is held for longer than 12 months. Capital gains made on the sale of assets held for less than 12 months are taxed at 15%.
However, if your super is in the retirement phase, there is no tax on your investment earnings. There are limits to the government’s generosity though, in the form of a transfer balance cap, which limits the amount of your funds that can be transferred from the accumulation phase to the retirement phase. This cap is currently $1.6 million.
3. On the way out, when you withdraw benefits (though these are generally tax-free if you’re over 60).
When the time comes to start drawing down your super, benefits can be paid as a lump sum, an income stream, or a combination of both. As mentioned earlier in this article, this generally only happens once you have reached your preservation age and met a condition of release. If you’re aged over 60 when you access your super, withdrawals will usually be tax-free.
The bottom line
This article has explained in broad terms how super is taxed in Australia, but it’s worth keeping in mind that superannuation tax legislation is complex. You should seek independent professional advice based on your individual superannuation circumstances.
The information contained in this article is general in nature.