Taxation in superannuation is a complex subject and the information provided in this article is broad and of a general nature; it should be taken as an advice.
Superannuation is often described as a tax incentive long-term savings for retirement as it is concessionally taxed compared to other types of investments outside of superannuation.
Superannuation is taxed in three stages:
- – On entry (tax on contributions);
- – On accumulation phase (tax on earnings); and
- – On exit (tax on withdrawal).
Tax on contributions
Certain contributions are taxed on entry into a superannuation fund at 15% flat. This tax is called the “contributions tax” and is collected by your super fund on behalf of the Australian Taxation Office (ATO) when you or your employer makes contributions. The contributions tax is deducted at the time when the contribution is allocated to your account.
If you exceed the contributions caps, you will have to pay excess contributions tax which is 31.5% on top of the 15% contributions tax you have already paid.
Additionally, if you do not give your tax file number to your super fund, you will have to pay the No-TFN tax and this is 31.5% on top of the 15% contributions tax you have already paid.
It should be noted that the contributions tax is levied by the ATO but collected by your fund.
Tax on investment returns
During the accumulation phase, your superannuation account balance, which is generally made up of contributions (and rollover if any), is invested in accordance with your chosen investment option(s). Investment earnings (interest) are regularly added to the account balance. Investment earnings received during the accumulation phase are taxed at a maximum rate of 15%.
At retirement, you have the options to take your super as a lump sum, income stream (pension) or both. Alternatively, you can leave it in the superannuation environment
One of the incentives of taking your super as an income stream (you receive regular payments) as opposed to a lump sum is that any investment earnings you receive from the income stream account are taxed exempt. If you leave the money in a superannuation environment, earnings received from it are taxed at 15%.
In comparison, the interest earned outside of superannuation is taxed at your highest marginal tax rate. For example, if you’re a high income earner and you have a term deposit account, interest may be taxed at up to 46.5%.
Tax on withdrawal
You may or may not have to pay tax when you withdraw your superannuation benefits.
Whether or not you have to pay the withdrawal tax and if so, how much will depend on many factors: your age, your benefit components and whether you’re taking your superannuation as a lump sum or income stream. How much you withdraw as a lump sum may also impact the amount of tax you have to pay.
If you don’t give your tax file number to your super fund, you may also have to pay additional tax on entry and on withdrawal.
A death benefit paying to a dependant is not taxed. However, if paying to a non-dependant, it will generally be subject to 15% tax.
People who come to Australia on an eligible temporary working visa are able to apply for the payment of their superannuation when they leave. This is called Departing Australia Superannuation Payment and the Taxable component is taxed at 35% from element taxed and 45% from element untaxed.
If you would like to know more about how your superannuation benefits are being taxed applicable to your situation, we recommend that you seek advice from a qualified accountant or financial planner.
Contributions tax and withdrawal tax are complex and will be discussed in greater detail in separate articles.
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