Is Superannuation Taxed in Australia? A Detailed Breakdown

Superannuation is a key part of Australia’s retirement system, helping individuals save for their later years. However, many people are unsure about how it is taxed at different stages—when contributions are made, while funds are invested, and when withdrawals occur. Understanding these tax rules can help maximize savings and avoid unexpected costs.

Taxation varies based on income level, age, and withdrawal type. Some contributions receive tax benefits, while others may face additional charges. Investment earnings are taxed differently depending on whether the account is in the accumulation or retirement phase. Accessing funds before retirement can also trigger penalties.

Contribution Taxes

Superannuation contributions are taxed based on how they are made and an individual’s circumstances. Some contributions receive concessional tax treatment, while others come from after-tax income. Additional charges may apply for high-income earners. Understanding these distinctions helps individuals plan contributions effectively and minimize tax liabilities.

Concessional

Concessional contributions are made before tax and include employer super guarantee payments, salary sacrifice arrangements, and personal contributions for which a tax deduction is claimed. These contributions are taxed at 15% when received by the super fund, which is lower than most individuals’ marginal tax rates. However, annual limits apply—$27,500 for the 2023–24 financial year. Exceeding this cap results in the excess being taxed at the individual’s marginal rate, minus a 15% offset for tax already paid by the fund.

High-income earners (above $250,000 per year) are subject to an additional Division 293 tax of 15%, bringing the total tax on concessional contributions to 30%. This reduces tax benefits for top earners while maintaining incentives for lower and middle-income individuals to save for retirement.

Non-Concessional

Non-concessional contributions come from after-tax income and are not taxed when received by the super fund. These include voluntary personal contributions that do not claim a deduction. The annual cap for these contributions is $110,000 for 2023–24, with an option to bring forward up to three years’ worth (up to $330,000) if under age 75.

Exceeding this cap may result in a penalty tax of up to 47%, unless the excess is withdrawn along with associated earnings, which are taxed at the individual’s marginal rate. Individuals with a total super balance above $1.9 million (as of June 30, 2023) cannot make further non-concessional contributions.

Additional Surcharges

Beyond standard tax rates, certain individuals may face extra charges. Division 293 tax applies to those earning above $250,000, effectively reducing tax advantages for higher-income earners. Excess concessional contributions are taxed at the individual’s marginal rate instead of the concessional 15%, with an additional interest charge applied by the ATO to account for the deferred tax payment.

Self-managed super funds (SMSFs) must comply with strict reporting rules to avoid penalties. Failing to meet reporting deadlines or exceeding contribution limits can result in additional tax liabilities.

Investment Earnings

Earnings within a superannuation fund are taxed differently depending on whether the account is in the accumulation or retirement phase. While funds are growing before retirement, investment returns—such as interest, dividends, and capital gains—are taxed at 15%.

Capital gains on assets held for more than 12 months receive concessional treatment, reducing the effective tax rate to 10%. This encourages long-term investing over frequent trading, which would otherwise attract the full 15% tax rate on short-term gains. Managed funds and SMSFs must track asset holding periods to maximize this tax advantage.

Once an individual transitions to the retirement phase, investment earnings on assets supporting a retirement income stream become tax-free. However, the amount that can be transferred into this tax-free environment is capped at $1.9 million under the transfer balance cap as of 2024. Any excess must remain in the accumulation phase, where earnings continue to be taxed at 15%.

Withdrawals

Withdrawals can be taken as a lump sum, an income stream, or in limited cases before reaching preservation age. Each method has different tax treatments, which can impact the final amount received.

Lump Sum

Withdrawing super as a lump sum is an option for those who have met a condition of release, such as reaching preservation age and retiring. The tax treatment depends on the recipient’s age and the components of their super balance.

For individuals aged 60 and over, lump sum withdrawals from a taxed super fund are generally tax-free. For those under 60, the taxable portion is subject to tax at either 17% (including the Medicare levy) for amounts up to the low-rate cap ($235,000 for 2023–24) or the individual’s marginal tax rate for amounts exceeding this threshold.

Withdrawals made before preservation age under specific conditions, such as severe financial hardship or terminal illness, are taxed differently. Withdrawals under compassionate grounds are taxed at 22% (including the Medicare levy) unless an exemption applies.

Income Stream

A superannuation income stream, or pension, provides regular payments from a super fund. For individuals aged 60 and over, income stream payments from a taxed super fund are entirely tax-free. For those between preservation age and 59, the taxable portion of payments is subject to marginal tax rates, with a 15% tax offset available.

Minimum annual withdrawal requirements apply to account-based pensions. These minimums are set as a percentage of the account balance, starting at 4% for individuals under 65 and increasing with age (e.g., 5% for those 65–74, 6% for 75–79). Failing to meet these minimum withdrawals can result in the pension losing its tax-free status, reverting earnings to the 15% accumulation phase tax rate.

Early Access

Accessing super before preservation age is generally restricted to prevent premature depletion of retirement savings. Early withdrawals are permitted under specific circumstances, including severe financial hardship, compassionate grounds, terminal illness, or total and permanent disability.

For financial hardship withdrawals, individuals must have been receiving eligible government income support payments for at least 26 consecutive weeks and be unable to meet immediate living expenses. These withdrawals are capped at $10,000 per year and taxed at 22% (including the Medicare levy) if the individual is under preservation age. In contrast, withdrawals due to terminal illness are entirely tax-free, provided medical certification confirms a life expectancy of less than 24 months.

Illegal early access, such as withdrawing super without meeting a valid condition of release, can result in significant penalties, including additional tax liabilities and fines imposed by the Australian Taxation Office (ATO). Individuals considering early access should seek professional advice to ensure compliance with superannuation regulations.