Taxation of Superannuation in Australia

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Superannuation in Australia is taxed at three points: on contributions made, investment income and benefits paid.

1 Tax on Contributions
2 Tax on Investment Income
3 Tax on Benefits Paid
4 Notes
5 See also
6 External links

[edit] Tax on Contributions

Employer contributions are taxed inside the superannuation fund at a rate of 15% (including pre-tax or "salary sacrifice" contributions). Contributions by the self-employed are 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.

Employee contributions made voluntarily out of after-tax income ("post tax" or undeducted contributions) do not attract a tax liability.

There are some allowable deductions including those on administration expenses, investment management expenses and insurance premiums.

[edit] Tax on Investment Income

Investment income is taxed at a headline rate of 15%, although in reality the average tax rate is much lower than this, typically around 6.5% ^[1]

The average tax paid on investment income is usually lower than the nominal rate of 15% because:

the dividend imputation system allows a refund of imputation credits on Australian equities;
capital gains on assets held more than 12 months are only taxed at 10%;
other tax credits such as foreign tax credits apply.

Investment income derived from assets backing pensions (retirement income streams) is said to be "exempt" income and tax is not levied, although dividend imputation means that negative tax rates are often seen in superannuation funds.

[edit] Tax on Benefits Paid

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 ($135,590 in 2006/07 for those 55 and older) is tax free
amounts above that are generally taxed at 15% plus the medicare levy.

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 its 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.