Do You Pay Tax on Super? When and How It’s Taxed

A retirement savings system, often compulsory, serves as a cornerstone for financial security after the working years. This system is designed to help individuals accumulate wealth over their careers, but it is also subject to various tax treatments throughout its lifecycle. Understanding how and when these taxes apply is important for maximizing the benefits accumulated for retirement. Different stages of the savings process, including contributions, investment earnings, and withdrawals, each have distinct tax implications that can affect the overall amount available for retirement.

Taxation of Retirement Savings Contributions

Contributions made into a retirement savings system are generally categorized based on whether they are made with pre-tax or after-tax income. Pre-tax contributions, such as those made by an employer, are typically subject to a specific tax rate upon entry into the fund, often around 15%. This concessional tax rate applies up to a certain annual limit.

Individuals may also make after-tax contributions from their already taxed income. These contributions are generally not taxed again when they enter the retirement savings system, as the tax has already been paid on the original income. There are also annual limits for these contributions.

Exceeding these contribution limits can result in additional tax liabilities. If pre-tax contributions go over the annual limit, the excess amount is included in the individual’s taxable income and taxed at their marginal income tax rate, though a tax offset may apply. For after-tax contributions, exceeding the cap can lead to further tax on the excess amount, unless the excess is withdrawn from the fund. Some systems allow individuals to carry forward unused contribution amounts from previous years, often subject to certain conditions. Other rules may permit making multiple years’ worth of after-tax contributions in a single year, depending on the total retirement savings balance.

A separate tax may apply to pre-tax contributions for high-income earners. This additional tax, often around 15%, is levied on pre-tax contributions if an individual’s income, combined with their pre-tax contributions, exceeds a certain threshold. For those affected, the total tax on their pre-tax contributions can effectively become higher, for example, around 30%. This tax applies to the lesser of the amount by which their income exceeds the threshold or their total pre-tax contributions.

Taxation of Retirement Savings Fund Earnings

Once contributions are made to a retirement savings fund, the investment earnings generated within the fund are also subject to tax. The fund itself is responsible for paying tax on these investment returns. During the accumulation phase, investment earnings are generally taxed at a rate of 15%. This tax is typically deducted from the investment earnings before they are credited to the individual’s account.

A significant tax benefit occurs when the retirement savings account transitions into the retirement phase, specifically when converted into an income stream or pension. In this phase, earnings on the capital supporting the income stream are generally taxed at a 0% rate. This tax exemption applies up to a certain limit. This tax-free treatment of earnings in the retirement phase provides a substantial incentive for individuals to move their savings into an income stream once they are eligible.

Taxation of Retirement Savings Withdrawals and Payments

Accessing funds from a retirement savings system involves specific tax considerations, which largely depend on the recipient’s age and the type of payment. A significant distinction exists for those aged 60 and over, as withdrawals are generally tax-free. This means that once an individual reaches age 60 and meets specific conditions for accessing their savings, they typically do not pay tax on lump sum withdrawals or income stream payments.

The tax treatment of withdrawals is also influenced by the composition of the retirement savings balance, which consists of a “tax-free component” and a “taxable component.” The tax-free component primarily comprises after-tax contributions made by the individual, as these amounts have already been taxed before being contributed to the fund. Conversely, the taxable component generally includes pre-tax contributions and accumulated investment earnings, which have been subject to the concessional tax rate within the fund. When a lump sum is withdrawn, the tax-free component is always received without further tax.

For individuals under the age of 60, different rules apply to lump sum withdrawals. While the tax-free component remains untaxed, the taxable component of a lump sum withdrawal is subject to tax. For those under 60 who are eligible to access their savings, the taxable component of a lump sum payment may be taxed at a maximum rate of 20%.

When retirement savings are paid out as an income stream or pension to individuals under 60, the taxable component of these payments is included in their assessable income. However, a tax offset may apply, which can reduce the amount of tax payable. The specific tax offset percentage can vary depending on factors such as the individual’s age and the type of income stream.

Tax implications also arise when retirement savings are paid out as death benefits to beneficiaries. If the death benefit is paid as a lump sum to a “tax-dependant,” such as a spouse, a minor child, or another individual who was financially dependent on the deceased, the payment is generally tax-free. This applies to both the tax-free and taxable components of the benefit.

However, if the lump sum death benefit is paid to a “non-tax-dependant,” such as an adult child who was not financially dependent, the taxable component of the payment is subject to tax. The taxed element of the taxable component is generally taxed at 15%, while any untaxed element is taxed at 30%. These tax rates are standard for death benefits and are not influenced by the beneficiary’s other income.