The taxable components of your superannuation are probably not something that people look too hard at. But if you read through your super statements in a yearly or half-yearly timeframe, you will see them there.
Thus, it is essential to know how superannuation is taxed and how changes in the taxation system can affect your super investments. In this post, we will discuss how super is taxed along with the recent changes in the super tax system.
How is superannuation taxed?
You superannuation money may be taxed at the following stages:
After-tax or Non-concessional personal contributions, as well as those obtained under the co-contribution scheme, aren't taxed when they're placed in your fund.
Mostly, when the money is moved from a superannuation fund towards another when switching or consolidating, there is no extra tax payable. Tax can only be paid if you're switching from the untaxed super fund, like an older form of public sector funding for government workers.
Also, there are limitations on the amount you may contribute to superannuation, and there exist certain penalties for exceeding these limits.
Check out the ATO's website for detailed info on the super changes from July 1, 2017.
How to tax investment earnings
Income that is earned as investment earnings within the fund is taxed minimally at 15%. The capital gains over your assets stored for more than a year in the fund are taxed at 10%.
How much tax credits or tax deductions can lessen your super fund investments. For instance, a growth fund could only pay 7% tax averagely as its dividend income allows it towards tax credits.
How superannuation withdrawals are taxed
Once you are permitted to gain access your super money, you can then take a superannuation income stream towards giving you an income regularly, or you may withdraw everything or a portion of the benefit in the form of lump sum.
Superannuation income stream
The super income streams' tax treatment is covered comprehensively on our tax and retirement income page. If you're over 60, your income may be tax-exempt. If you're under 60, however, you may have to pay tax on your pension.
Withdrawing lump sum
If you're over 60 years old, withdrawals from the taxed fund will be tax-exempt. Untaxed funds, like government superannuation funds, may charge different rates.
Should you access the superannuation before you turn 60, you could pay tax on your withdrawals. You can take up towards the lower-rate threshold, which is currently at $200,000, tax-exempt is a lifetime threshold, and indexed annually.
This threshold doesn't include a tax-exempt portion if your account, which are paid back to you tax-free. An amount in the lower-rate threshold will have a marginal tax rate or have a 17% tax, depending on which is lower.
If you're trying to acquire a lump sum from your super and you still haven't reached the preservation age, then this withdrawal will have a tax of 22% or have a marginal tax rate, again depending on which is lower. Also, there exist limited cases where you could access superannuation before you reach the preservation age.
While it is true that you can get a lump sum, it may not essentially be the most plausible plan for you. The experts suggest that you seek out the financial advice of the professionals before withdrawing funds from super.
For thorough info on how other lump sums are taxed. Check out the ATO website on death and lump sum withdrawals benefits.
How death benefits are taxed
Once an individual dies, his or her superannuation balance is often paid towards their beneficiary, and this is known as "superannuation death benefit." Super benefits are composed of two parts: taxable and tax-free, which could come from an untaxed or taxed source).
The tax-exempt component includes:
The taxable (taxed) part includes:
Personal contributions to the claimed tax deduction
The taxable part is only applicable to superannuation from the untaxed source, like a defined benefit fund for the government workers.
Superannuation withdrawal and re-contribution strategies
Perhaps, you have heard of individuals utilizing a re-contribution and withdrawal strategy once they have retired as a means of reducing any tax paid by non-dependent beneficiaries once they die.
While withdrawing from superannuation, the withdrawal's components are in line with the parts of your fund balance. If your super balance is composed of 90% taxable and 10% tax-exempted components, any withdrawals are taken as 90% taxable and 10% tax-exempted. You can't decide to withdraw from just a single part of your superannuation.
Re-contribution and withdrawal strategies involve acquiring a lump sum payment from superannuation and then contributing the amount back as tax-exempt after-tax (non-concessional) contribution. This may lead to a much higher tax-exempt part within your fund.
Things you have to consider before employing a withdrawal and re-contribution strategy
There are several things to consider before you decide to go ahead, these are:
Standard contribution limits bind Re-contributions
How to get on top of your Super through Concessional and Non-concessional Contributions
Once you've retired, your super will surely be crucial and perhaps your major income source. For that reason, it is a great idea to add money to it while you are still making a living.
But are you aware there also several plausible tax benefits you can make the most of at the moment – just by paying voluntary super contributions?
Two major ways to top up your super:
Am I required to pay tax on superannuation?
Mostly, yes, but often at a low rate.
Superannuation can be taxed at the following probable stages:
Fortunately, the super tax rates are frequently less than a normal tax on income as well as regular investment earnings. They are also known as "super tax concessions."
Tax on withdrawals from your super
Once you're allowed to gain access to your superannuation fund, you can withdraw it all as a lump sum or get it pay to you as a normal income. And both instances, if you are aged over 60, your withdrawals from super are often tax-free.
Should you withdraw from super before the age 60, either as an income or as the lump sum, then you will probably need to pay tax.
Certain conditions may apply to your situation
If you are earning below $37,001 annually, the tax paid over your contributions is, in fact, placed back towards your superannuation by the ATO via the Low Income Super Contribution Scheme. Also, note that the government has been moving to stop this scheme.
Should you earn over $300,000 annually, then there may be a need for you to pay additional tax on your superannuation because of reduced tax concessions for high-wage earners.
Moreover, there may also be a need for you to pay more tax should you contribute excessively towards your super.
Tax isn't paid for certain transactions including:
Consolidating numerous super accounts in one account
Note: We can help you consolidate numerous super accounts into one account. If you have lost super, we can help you find and consolidate lost super so you can avoid paying extra tax and fees and it will be easier for you to manage your super.
For the free consultation on this matter, contact us at - 1300 252 167
Superannuation Taxes attract Criticism
Federal Laws have passed to raise the superannuation contributions level from 9 – 12%. But a fresh battle is brewing out of the way superannuation is taxed. Each year the government forgoes including around 13 billion dollars through tax breaks for superannuation.
Critics argue that as concessions fade to the rich and there's a push to have the system overhauled.
Ever since Paul Cating introduced compulsory superannuation in 1992, the system has been in a seemingly constant state of flux. Back in 2012, the government gave the super regime another makeover, raising the level of compulsory contributions from 9-12%.
What the government says is interested in doing, is making sure that Australians have enough money to retire on.
But the constant tinkering with super seems far from over. And next battlegrounds could well be over the tax breaks given to superannuation.
Some experts say that the idea of some tax-concessions on superannuation makes sense but Australians are spending 30 billion dollars a year and it's not clear why.
Under the existing system, employer and employee contributions are taxed at 15%. Investment income within a fund is taxed at 15% (the same concessional rate), and benefits received after age 60 are tax-free.
The experts claim that those rates overwhelmingly favor the rich. They think the current way of taxing superannuation is regressive.
30% of the tax concessions are going to the wealthiest 5% of income earners. So we have a system that's delivering around 10 billion dollars a year to the wealthiest 5% of Australians and virtually nothing to the poorest 3rd of the population.
Some experts say it's only part of the picture. If we look at super tax concessions alone, they favor the high-income earner. But retirement income system is built in the three pillar system of Australia – the pension, the super guarantee compulsory contribution, and voluntary super.
Looking at the picture as a whole, some experts believe that it's a very equitable outcome.
Merca has modeled how much government support is given to the typical worker through either superannuation concessions or the age pension. It's found that the total amount of support the age workers retirement is similar to all income levels.
For an individual over a lifetime, the government support is either through the tax-concessions or the age pension, or a combination of both. And that's pretty level across all income streams. It's in the order of about 400,000 dollars for an individual across the working career and the post-pension age.
The Minister for Superannuation says the reforms announced this wake would help low-income earners. But the industry remains wary of further changes to the system.
We have to make sure that the tax rules don't change every budget because people will claim that they are contributing on a particular year or contribute for thirty to forty years and they are expecting the benefit to having appropriate taxation support.
So far the government has rejected the call to change tax-concessions on super although, with the criticisms against how super is taxed, the temptation to change the system could be hard to resist.
According to Robert Carling, How Must Super Be Taxed?
Without having to resort to budget repair, the compulsion to increase taxes on super as well as tighten their caps would not have gained momentum. Super is highly tempting as prey for politicians out on the hunt for profit, and members should be warned of the risk of being repeatedly raided in the indefinite future.
To balance the budget is very significant but alone does not overwhelm the principles which leads to the pre-tax treatment of super. The regulatory, as well as the tax system dedicated to super, has to be grounded in these principles, not just simply interruptions to raise additional profit.
Contribution limits are therefore needed. However, their levels must be based on actuaries and statistics and should allow adjustability in the mix as well as the timing of a person's donations. The tightness made by the government as a proposal is draconian, and justification with more detail is not included.
'Fairness' is always given as a reason for tighter measures on concessions, however there is a lot more to it than robbing the rich - like a fair return of effort as well as sacrifice using savings and consumption that you forego; as well as respecting policy measures which form the basis for people's previous commitment to super.
The level of concessionality is a matter for personal judgment; however, the issue has been formed by incorrect references to 'tax-free super' as well '$30 billion every year in missing profits'. There is nothing like 'tax-free' super as well as the standard used to estimate missing profit is not worthy of purpose.
The taxable component of superannuation is essentially the concessional contributions that are being put into the fund. What is meant by concessional contributions is where the employer puts the 9.25% that goes into the taxable portion of the fund.
If you make a salary sacrifice – again – as a concessional contribution, and you're receiving a tax advantage at a super tax rate of 15%, about your tax rate, that will go into the taxable component of your fund.
Let's say that over the many years you've saved up some term deposits or some shares outside of super and you'd like to move them across, and this is money that you've built up over time and you've paid your tax on already – that money can go into the super fund as a non-concessional contribution.
Non-concessional contributions go to the tax-free component of the superannuation fund. These taxable and tax-free components have a bearing on pensions when paid out at the ages of 55-60 and also a bearing on death.
We hope you liked this post. For a complete guide on Super and Tax, refer to the article guide – Nice Guide to Superannuation Tax.
Disclaimer: All information on this website is of a general nature only. We have not taken into account your financial situation, needs or objectives. You need to make up your own mind and ascertain yourself if it is right for you. We recommend you read the product disclosure statement(s) and the financial services guide before making any financial decision.