Taxation of Superannuation in Australia

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Superannuation in Australia is taxed by the Australian taxation system at three points: on contributions received, investment income and benefits paid.

Tax on contributions[edit]

Superannuation contributions are split into two classes - Concessional and Non-Concessional.[1] Concessional contributions (sometimes referred to as 'before-tax' contributions) are contributions for which someone (such as an employer) has received a tax deduction.[2] Concessional contributions include Superannuation Guarantee contributions, Salary Sacrifice contributions, other employer contributions and contributions claimed as a personal tax deduction. Concessional contributions are taxed in the fund. While Taxable Components do not change the tax payable by the super fund, they are a factor in calculating the tax payable on withdrawals from a super fund. Non-Concessional Contributions (sometime referred to as 'undeducted' or 'after-tax' contributions) are contributions for which no-one has received a tax deduction. Non-Concessional Contributions are, generally, not taxed in the fund.[3]

Concessional Contributions, provided they are under the Concessional Contributions Cap, are taxed at 15% in the fund.[4] The Concessional Contributions Cap for the 2013/14 Financial Year is $ 25,000, except for people who were over the age of 59 as at 30 June 2013 - for whom the cap is $ 35,000.[5] Exceeding this cap will trigger Excess Contributions Tax of an additional 31.5% on the amount above the cap, on top of the 15% already applying to Concessional Contributions.[6]

Non-Concessional Contributions, provided they are under the Non-Concessional Contributions Cap, are not taxed in the fund.[7] However if the Non-Concessional cap of $150,000 (or $450,000 in a three-year period under the Bring-Forward Rule[8]) is exceeded a tax rate of 46.5% applies to the excess.[9]

Tax on investment income[edit]

Superannuation fund investment income is divided into two categories. Investment income derived from those assets backing pensions (retirement income streams) is "exempt" income of the fund, while all other income is generally assessable income of the fund. If the investment income includes dividend income, any imputation credits form part of the fund income, either assessable or exempt. In either case, the fund is entitled to a tax credit for the imputation credits as if they are a credit for tax paid by the fund. If the credits exceed the fund's tax liability, the excess is refundable.

Allowable deductions[edit]

Expenses of the superannuation fund, such as administration expenses, investment management expenses and insurance premiums, are allowable (ie., before-tax) deductions against fund income. Life insurance premiums paid by the fund are deductible by the fund before-tax; while the same premium paid directly by the individual may not be (ie., would be paid from after-tax income).

Tax rates[edit]

The taxable income of a superannuation fund is the fund's assessable income - which excludes exempt income and undeducted contributions - less allowable deductions. The taxable income is taxed at a flat rate of 15%. Investment income derived from assets backing pensions (retirement income streams) is "exempt" income. Undeducted contributions are those which the employer or the member cannot or has chosen not to claim as a deduction from their respective assessable income.

In reality, the actual average tax rate can be lower than this, typically around 6.5%.[10] This is because:

  • the dividend imputation system allows a credit for imputation credits on Australian shares
  • capital gains on assets held more than 12 months may be taxed at a lower rate
  • other tax credits such as foreign tax credits may apply.

If these assets are shares, dividend imputation may result in a tax refund.

Tax on benefits paid[edit]

Taxation of benefits is very complex and depends on whether:

  • the benefit is received as a lump sum or a pension
  • the benefit is received for retirement, death or disability
  • the benefit is paid to a dependent or non-dependent
  • the tax payer was a member of a fund prior to 1983

Other factors that could affect the tax liability of benefits include the level of undeducted contributions made and other components such as transfers of amounts from the sale of a small business.

Generally for a lump sum superannuation payout (Eligible Termination Benefit):

  • the portion of the benefit relating to undeducted contributions is tax free
  • the remaining amount below the low tax threshold ($160,000 in 2010/11 for those 55 and older) is tax free
  • amounts above that are generally taxed at 15% plus the Medicare levy
  • the low tax threshold is indexed annually by Average Weekly Overtime Earnings in increments of $5,000.

For recipients of social security payments, pension amounts are taxed as normal income through the PAYG system except where there is a deduction for the portion of the benefits funded by undeducted contributions (the "deductible amount") or at a 15% rebate on the pension amount less the deductible amount.

Special arrangements apply for benefits which exceed Reasonable Benefit Limits.

In the Budget for the 2006/07 financial year, the Australian government announced a variety of proposals, including the removal of all taxes on end benefits for those over age 60. These measures are planned to come into effect from 1 July 2007.

See also[edit]

Notes[edit]

  1. ^ http://www.ato.gov.au/Individuals/Seniors-and-retirees/Super/Contribution-caps/
  2. ^ http://www.ato.gov.au/Individuals/Super/Other-contributions/Concessional-(before-tax)-contributions/
  3. ^ http://www.ato.gov.au/Individuals/Super/Other-contributions/Non-concessional-(after-tax)-contributions/
  4. ^ http://www.ato.gov.au/Individuals/Seniors-and-retirees/Super/Contribution-caps/
  5. ^ http://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?anchor=Contributionscaps
  6. ^ http://www.ato.gov.au/individuals/super/in-detail/contributions/super-contributions---too-much-super-can-mean-extra-tax/?page=12
  7. ^ http://www.ato.gov.au/Individuals/Seniors-and-retirees/Super/Contribution-caps/
  8. ^ http://www.ato.gov.au/individuals/super/in-detail/contributions/super-contributions---too-much-super-can-mean-extra-tax/?page=23
  9. ^ http://www.ato.gov.au/Individuals/Seniors-and-retirees/Super/Contribution-caps/
  10. ^ George Rothman, 2000, "Assessing The Tax Advantages Of Investment In Superannuation".

External links[edit]