Taxation of Superannuation in Australia
|An aspect of fiscal policy|
Tax on contributions
Employer contributions (including pre-tax, superannuation guarantee and "salary sacrifice" contributions) are assessable income of the superannuation fund. Similarly, contributions by the self-employed are assessable income of the superannuation fund, to the extent that the contributor is entitled to a tax deduction for the contribution. In this case the contributor is taxed at the marginal rate via the income tax system, and a maximum deduction of $5000 plus 75% of the contributions over $5000 can be made. The amount which is not deductible by the contributor is an "undeducted contribution" to the superannuation fund, provided the contributor gives the fund notice that the contributor will not be deducting the amount.
Employee contributions ("post tax" or undeducted contributions) made out of after-tax income do not attract a tax liability (although it is proposed that after 1 July 2007 after tax contributions above certain limits will be subject to tax).
Tax on investment income
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.
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).
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%. 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
|This section's factual accuracy may be compromised due to out-of-date information. (November 2010)|
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.
- George Rothman, 2000, "Assessing The Tax Advantages Of Investment In Superannuation".