Does Super Get Taxed? How Superannuation Tax Works

Superannuation, often called “super,” is Australia’s primary system for individuals to save for their retirement years. It functions as a long-term investment vehicle designed to accumulate funds during a person’s working life, providing financial support once they stop working. Employers contribute a percentage of an employee’s earnings into a superannuation account, and individuals can also make additional payments. Understanding how these contributions, the fund’s earnings, and eventual withdrawals are taxed is essential for maximizing retirement savings.

Tax on Super Contributions

Money contributed into a superannuation fund receives specific tax treatment, varying based on the contribution type. Contributions are broadly categorized into “concessional” and “non-concessional.” Concessional contributions are made from pre-tax income, encompassing employer contributions, amounts salary sacrificed, and personal contributions for which a tax deduction is claimed. These contributions are generally taxed at a flat rate of 15% within the super fund itself.

High-income earners may face an additional tax on their concessional contributions, known as Division 293 tax. This applies if an individual’s combined income and concessional contributions exceed a threshold of $250,000 for the 2024-2025 and 2025-2026 financial years. Division 293 tax levies an extra 15% on the lesser of the concessional contributions or the amount by which income exceeds the threshold, effectively bringing the tax rate on these contributions to 30% for affected individuals.

Non-concessional contributions, conversely, are made from after-tax income, meaning the individual has already paid income tax on the money. These include personal contributions not claimed as a tax deduction and certain spouse contributions. Due to their after-tax nature, these contributions are generally not taxed when they enter the super fund. It remains important for individuals to provide their Tax File Number (TFN) to their super fund to ensure correct tax treatment and avoid potential higher tax rates on their contributions.

Tax on Super Fund Earnings

The investment earnings generated by assets held within a superannuation fund are subject to taxation, with the rate depending on the fund’s operational phase. During the “accumulation phase,” while an individual is still contributing to their super and not yet drawing a retirement income, the investment earnings are generally taxed at a concessional rate of 15%. This rate is often lower than the marginal income tax rates that would apply to investments held outside of superannuation.

Tax benefits arise once a super fund transitions into the “retirement phase.” This occurs when an individual begins drawing a regular income stream, such as a superannuation pension, from their super balance. At this point, the investment earnings on the assets supporting that pension become generally tax-free, meaning a 0% tax rate applies.

Tax on Super Withdrawals

Accessing funds from a superannuation account involves specific tax rules that primarily depend on the individual’s age and the composition of their super balance. The earliest age an individual can generally access their super is their “preservation age,” which varies from 55 to 60, depending on their date of birth. To withdraw funds at preservation age, an individual must also meet a “condition of release,” such as retiring from the workforce.

For individuals aged 60 and over, withdrawals from a taxed super fund, whether taken as a lump sum or as a regular income stream (pension), are generally tax-free. This tax exemption applies regardless of the amount withdrawn.

However, if an individual is under 60 but has reached their preservation age and a condition of release, different tax rules apply. Lump sum withdrawals for those under 60 but above their preservation age are generally tax-free up to a “low-rate cap amount,” which was $235,000 for the 2023-2024 financial year and is subject to annual indexation. Any amount withdrawn above this low-rate cap is taxed at 17% or the individual’s marginal tax rate, whichever is lower. Income stream payments for individuals in this age bracket are taxable, but they receive a 15% tax offset on the taxable component of their pension income. Superannuation balances consist of tax-free and taxable components; the tax-free component is always exempt from tax upon withdrawal.

Super Contribution Caps

Annual limits, known as “caps,” are placed on the amounts individuals can contribute to their superannuation accounts. Exceeding these caps can lead to additional tax liabilities. For the 2024-2025 and 2025-2026 financial years, the general concessional contribution cap is $30,000. This cap applies to the total of all pre-tax contributions, including employer payments, salary sacrifice, and personal contributions claimed as a tax deduction. If this cap is exceeded, the excess amount is added to the individual’s assessable income and taxed at their marginal income tax rate, with a 15% offset to reflect the tax already paid by the super fund. Unused portions of the concessional cap can be carried forward for up to five years, provided the individual’s total superannuation balance was less than $500,000 at the end of the previous financial year.

The non-concessional contribution cap, which applies to after-tax contributions, is $120,000 for the 2024-2025 and 2025-2026 financial years. A “bring-forward rule” allows eligible individuals under 75 years old to contribute up to two or three years’ worth of non-concessional contributions in a single financial year. For instance, in 2024-2025, this could allow a contribution of up to $360,000 over three years, depending on their total superannuation balance. However, if an individual’s total superannuation balance reaches or exceeds the general transfer balance cap (which is $2 million from 1 July 2025), their non-concessional contribution cap becomes nil.

Exceeding the non-concessional cap has tax consequences. The excess non-concessional contributions, along with 85% of their associated earnings, can be released from the super fund. The associated earnings are then taxed at the individual’s marginal income tax rate, less a 15% tax offset. If the excess is not released from the fund, it can be taxed at the highest marginal tax rate, currently 47%. Both concessional and non-concessional caps are regularly indexed.