Taxation of Superannuation in Australia

The investment income of a superannuation fund is assessable income of the superannuation fund. However, investment income derived from assets backing pensions (retirement income streams) is said to be "exempt" income.

[edit] Tax on Contributions

Employer contributions (including pre-tax, superannuation guarantee or "salary sacrifice" contributions) are assessable income of the superannuation fund. Contributions by the self-employed are taxed inside the superannuation fund on the same basis, 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).

[edit] Allowable deductions

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

[edit] Rates of Tax

The taxable income of a superannuation fund (which is the assessable income, which excludes exempt income, less allowable deductions) is taxed at a nominal 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 on which tax is not levied. If these assets are shares, dividend imputation may result in negative tax rates.

Also undeducted contributions to a superannuation fund are tax-free.

[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 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.