Super is an effective way of saving for your retirement, because it offers tax concessions that cannot be achieved outside of the super system. These concessions have been built into the super system to encourage Australians to save for their retirement.

Here we explore how tax is applied to super. How much tax you pay on your super savings depends on whether your super is in accumulation phase or pension phase.

Tax in ‘accumulation phase’

When you are actively building your super for future retirement, through contributions and investment returns, you are in ‘accumulation phase’ and your money will be held in an accumulation account. Super funds in an accumulation account are generally taxed at 15%.  This tax is levied on interest, dividends, managed fund distributions, concessional contributions (both employer and deductible member contributions) and capital gains on assets held for less than a year. The tax on capital gains on assets held for more than a year is taxed at a discount at 10%.

Tax in ‘pension phase’

When you reach retirement, and provided you satisfy the rules for being able to access your super (for example, age 65) you might move some or all of your money in accumulation to an account-based pension. Once money is moved to an account-based pension, instead of putting money into it, you draw money out of it. Typically, you draw money at regular intervals in regular amounts in line with cash needs. This is known as being in ‘pension phase’.

Each accumulation account and account-based pension are known as ‘super interests’. Super interests can be thought of as ‘pots’ within the fund.  It’s possible to have multiple account-based pensions, and each one is its own pot. It’s also possible to have an accumulation account sitting alongside one or more account-based pensions.

In pension phase, account-based pensions generally pay no tax on earnings. Earnings such as interest, dividends and capital gains made when you sell investments held within your fund, do not attract any tax. Zero. On top of this, when franking credits and foreign tax credits are included, super funds can potentially reduce any tax liability further and may even be entitled to a cash refund when franking credits exceed tax liabilities.

So, you can see why super offers such a favourable tax environment compared to other non-super investments, where you will pay tax at a higher rate, often your marginal tax rate.

Should I put more savings into super?

If the tax savings are so favourable, why aren’t more of us putting even more into super? There’s a number of reasons.

Firstly, once your savings are in super, you can’t withdraw any money until you meet a ‘condition of release’. Each of us meets a condition of release when we turn 65. Some people may meet a condition of release earlier, depending of their year of birth and working status, or if they satisfy a very limited number of early release exceptions. In any case, the point here is that unlike non-super savings – such as money held in a bank account – you can’t simply take your money out whenever you like. You have to satisfy conditions first.

Secondly, there are rules around how much you can contribute to super. These are known as ‘contribution caps’. The caps are designed to prevent people using the super tax concessions unreasonably, that is, on savings that go well above what might be needed for retirement. At the moment, the most you can contribute annually is $27,500 from your before tax money, and $110,000 from your after-tax money. Once your total super balance reaches $1.9 million, you can’t make anymore after-tax contributions.  

Finally, your super contribution and withdrawal strategies need to be considered in the broader context of your financial objectives and situation. There is no one-size-fits-all approach to super, or financial and retirement planning. Super and tax are complex. Care is needed when managing the investments and tax affairs of a super fund as they are not vehicles simply set-up to reduce tax. Personal advice, tailored to your situation, will help you figure out the best strategies for achieving your objectives.

General disclaimer

This content is intended only to provide a summary and general overview of the subject matter covered. It is not intended to be comprehensive nor does it constitute advice. We attempt to ensure that the content is accurate and current but we do not warrant the content nor its currency. You should seek professional advice before acting or relying on any of the content.

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