How your superannuation is taxed

Many of us accept that superannuation is a tax-effective means of saving for retirement, but fewer will understand just how our money is taxed within the system. This simple guide outlines the basics.

Before-tax contributions
Also known as concessional contributions, these include any payments that are made to your superannuation before tax. This includes the 9.5 per cent superannuation guarantee contribution made by your employer and any voluntary contributions they might make.

Salary sacrifice contributions, which have the effect of reducing your taxable income – possibly even putting you into a lower tax bracket, are also considered concessional contributions.

If you were aged 49 or older on 30 June 2015, then you can contribute up to $35,000 per annum (including compulsory employer contributions) to your superannuation before tax. These contributions are taxed at 15 per cent, which may be less than your marginal rate for income tax. Depending on how much you earn, salary sacrifice contributions can be an effective tax strategy. 

There are penalties for exceeding concessional contribution thresholds.

After-tax contributions
Of course, you can also make non-concessional contributions to your superannuation. These include any voluntary payments made from your take-home (after tax) salary, contributions for your spouse and any lump sum amounts, possibly from the sale of a house or an inheritance.

You can contribute up to $180,000 per annum after tax to your super and you will pay no tax on this amount. This is because you have already been taxed once on such income. If you exceed this cap in a financial year, and you’re under 65, you will trigger the ‘bring forward rule’ which is a three year period in which you can make up to $540,000 of non-concessional contributions. For instance, if you made a contribution of $250,000 in a financial year then you could make an additional $290,000 over the next two years. 

If you’re 65, the bring-forward rule doesn’t apply, and non-concessional contributions are subject to a work-test.

The Government co-contribution, should you qualify, is also classed as a non-concessional contribution, but it does not count towards the non-concessional cap.

Withdrawals from superannuation
If you’re over 60, and meet the requirements of being able to access your superannuation, then any money you withdraw is generally tax free. You can take such withdrawals as a lump sum or an income stream. While your personal circumstances will depend on which is more appropriate, an income stream can often be combined with a government Age Pension once you reach eligibility age.

If you are under 60, a portion, or a ‘component’ of your superannuation balance may be tax free. To find out how to calculate your tax-free component, visit ATO.gov.au. This may also appear on your superannuation statement.

The taxable component is subject to different rates of tax depending on your age and whether or not contributions were taxed or untaxed when paid into your superannuation.

While tax can be a complex subject, understanding the basics of how your superannuation is taxed can help you make decisions on how best to allocate your money. It’s important to get advice to ensure you’re making contributions in a way that maximises your tax savings without exceeding any caps or limits, so that you have the best chance to grow your savings and have more to enjoy when you retire.  

Make your super work harder for you. Visit australiansuper.com/56matters to get started.

This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, the Trustee of AustralianSuper ABN 65 714 394 898. The article contains general information and you should consider if it is right for you. 

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