Understanding how super is taxed is important in developing and implementing investment strategies that consider the after tax outcomes and legitimately optimise the net retirement benefits for each member.
The taxation of contributions, income and benefits is complex. The commentary below provides an overview only. It is very important to obtain specialist, taxation advice for your SMSF and your individual situation.
Concessional contributions
For most people, concessional contributions are taxed at 15%.
Concessional contributions in excess of the cap are included in your assessable income, and taxed at your marginal tax rate. To reduce the tax liability, the ATO applies a 15% tax offset to account for the contributions tax already paid by your fund.
You can pay the tax directly, or alternatively, withdraw the money from your super fund (85% of your excess concessional contributions). There is also a small interest charge (known as the Excess concessional contributions charge or ECC) to pay.
Let’s take an example. During the financial year, Mary (aged 52) salary sacrificed money to super and her total concessional contributions were $45,000. She has exceeded her cap of $35,000 by $10,000.
Mary lodges her income tax return and has a taxable income of $70,000. The ATO includes $10,000 of excess concessional contributions, which increases Mary’s taxable income to $80,000. Mary is assessed at her effective marginal tax rate of 34.5% (32.5% plus 2.0% Medicare levy), meaning that the additional tax payable as a result of the excess contributions is $3,450. A tax offset of 15% is then applied, which decreases her tax liability by $1,500. Mary’s tax liability on her excess concessional contributions is now $1,950 ($3,450 – $1,500), which she can pay directly or withdraw from her super fund.
Concessional contributions for high income earners
If your ‘income’ is more than $300,000 pa, your concessional contributions will be taxed at 30%. The definition of ‘income’ includes your taxable income, plus your concessional contributions, plus adjusted fringe benefits plus total net investment losses. For example, if your taxable income is $280,000 and your employer makes $25,000 in concessional contributions, you will trigger the threshold and your ‘income’ will be assessed as $305,000. The additional tax of 15% will apply to those concessional contributions that take your ‘income’ over $300,000 which in this case is 15% on the extra $5,000.
As an example. Assume your taxable income is $200,000, which has been calculated after deducting a net $90,000 loss on two investment properties. You also receive $10,000 in fringe benefits, and your employer makes super contributions of $18,000. Under this measure, your ‘income’ is:
| Taxable income | $200,000 |
| Concessional contributions | $18,000 |
| Fringe Benefits | $10,000 |
| Net investment losses | $90,000 |
| Adjusted income | $318,000 |
In this example, your $18,000 in concessional contributions will be taxed at 30%.
Non-concessional contributions
There is no tax applied to non-concessional contributions up to the cap amount of $180,000*.
Non-concessional contributions in excess of the cap amount are subject to 47.0% tax on the excess, although the Government has announced a proposal that would allow the excess to be withdrawn from the super fund along with any associated earnings, with only the associated earnings taxed at the member’s marginal tax rate.
Non-concessional ‘bring forward’ rule
*If you’re over 50 and under 65 years old at any time during the financial year, you can potentially bring forward the next two years of non-concessional contributions. This means that you can contribute up to three times the non-concessional cap (or $540,000) at once. The ‘bring-forward’ is automatically triggered when your non-concessional contributions exceed $180,000 in a particular year. Once this happens, your non-concessional contributions over the next two years cannot exceed $540,000 less the contributions you made in the year the ‘bring-forward’ was triggered.
Super lump sum payments
A super lump sum paid to a member aged 60 years or over is generally tax free. But for those under 60 years old, some tax is payable.
The lump sum benefit can comprise both a taxable component and a tax free component. The tax free component essentially represents the return of the member’s non-concessional contributions (that is, money the member contributed personally to the SMSF from his or her after tax income or assets). Accordingly, no tax is assessed on the tax free component.
The taxable component is that part of the lump sum benefit that may be taxable. It can comprise two parts:
- A taxed element which represents an amount that has already had tax paid on it within the fund. Additional tax may be payable when is taken out of the fund as a benefit (lump sum or pension), depending on the member’s age when it is taken out. The taxed element generally represents the return of ‘concessional contributions’ and the investment earnings of the fund and
- An untaxed element which is that part of the benefit (if any) that hasn’t had any tax paid on it in the fund. An untaxed element may occur if the fund has received a deduction for life insurance cover held through the fund, or a rollover of a member’s benefits from certain unfunded public sector super schemes. Some lump sum or pension benefits paid by SMSFs will not include an untaxed element.
The low rate cap is the limit set on the amount of the taxable component of a lump sum benefit that a person above preservation age but less than 60 years old can receive tax free. The low rate cap amount is indexed each year and is $185,000 in 2014/15.
The untaxed plan cap is the limit set on the concessional tax treatment of benefits paid as a lump sum from untaxed elements. The untaxed plan cap amount is indexed each year and is $1.355 million in 2014/15.
Super income streams
Pensions paid to a member 60 years or over are generally tax free. For persons under 60 years old, a tax offset may be available.
*15% tax offset available if disability super benefit
The final treatment depends on the source of the income from inside the SMSF. The source (or component) can be either tax free or taxable, with the taxable component potentially comprising a further two elements: a taxed element; and an untaxed element.
Depending on the source supporting the income stream, the benefit or pension will be apportioned between the tax free component and the taxable component in the same way that a lump sum is apportioned. The taxable component may be further divided into a ‘taxed element’ and ‘untaxed element’.
Let’s take an example, let’s assume Tom is 58 years old and taking a transition to retirement super pension of $10,000 pa. The components of the pension are 40% tax free (or $4,000), and 60% taxable ($6,000). Of the taxable component, there is no untaxed element. Tom’s other assessable income is $100,000.
The taxable component of Tom’s pension income ($6,000) will be added to his other assessable income and taxed at the normal rates. Effectively, Tom will pay tax at 39.0% (marginal rate of 37% plus Medicare of 2.0%) on this $6,000 or $2,340. Offsetting this, he will be entitled to a tax offset of 15% of the $6,000 or $900. So, the total tax that Tom will pay on his pension of $10,000 is $1,440 ($2,340 – $900).
Death benefits
Death benefits can only be paid as a pension to a beneficiary that meets the definition of a ‘dependant’ under both the super laws and tax laws. These include a spouse, a defacto spouse, a child under 18, a financially dependent adult child under 25 years old or a permanently disabled child. In all other cases, including a former spouse or a child over 18 and less than 25 years who is not financially dependent, the death benefit must be paid as a lump sum.
If an eligible pension is commenced by a child of the deceased member, the pension must be commuted to a lump sum by the time the child turns 25 years old. The only exemption is if the adult child has a permanent disability.
Death benefit lump sums are taxed as follows:
Death benefit income streams are taxed as follows:
*Paid as a proportion of the income payment
A death benefit income stream can only be paid to a dependant. The taxation treatment of a death benefit pension depends on the components of the deceased member’s benefit and the age of both the deceased member (at the time of death) and the age of the beneficiary when they receive the payment.
The taxation treatment is the same irrespective of whether the pension is a reversion of an existing pension that was paid to the deceased, or a new pension that is commenced from the deceased’s benefits that were in the accumulation phase.