How Is Super Taxed?

Introduction to Superannuation Taxation

Understanding how your superannuation is taxed can help you make more informed decisions on your super.

When it comes to superannuation, the tax treatment of contributions, withdrawals and investment earnings generally depends on a number of factors such as your account type, age and more.  

Let's take a closer look at how super is taxed in general¹.

Tax on Super Contributions

Whether you make before-tax contributions or after-tax contributions can make all the difference to the tax you pay on your super contributions.

Before-Tax (Concessional) Contributions

Concessional contributions refer to the amount of money that individuals contribute to their super fund from their pre-tax income. These contributions are generally taxed at a lower rate compared to Australia’s regular income tax rates.

You or your employer can both make before-tax (concessional) contributions from your pre-tax income. The Super Guarantee is one example of an employer’s concessional contribution to your super.

Starting 1 July 2024, you can contribute up to $30,000 in concessional contributions per financial year. Do note that this is subject to changes by the ATO.

Generally, these contributions are taxed at the concessional rate of 15%, except if you:

• Earn more than $250,000 per year,
• Haven’t provided your tax file number to your super fund, or
• Exceed the concessional contributions cap.

Extra taxes apply in these cases. For example, if your income and concessional contributions exceed $250,000, you may pay additional tax (Division 293 tax).

If you exceed the contributions cap, the excess contributions are added to your taxable income and taxed at your marginal rate, minus a 15% offset. If eligible, you may be able to carry forward unused concessional cap amounts from previous years.

After-Tax (Non-Concessional) Contributions

Alternatively, you can make after-tax (non-concessional) contributions from your take-home pay, which are subject to higher annual contribution caps due to their non tax-deductible nature.

After-tax contributions are only taxed if you exceed the non-concessional contributions cap, which is $120,000 each financial year from 1 July 2024.

If you go over this cap, you might be eligible to use future year caps under the bring-forward rule. 

More information on contribution types and contribution caps can be found on the ATO website or from a registered accountant.

Tax on Super Investment Earnings

In a nutshell, the amount of tax you pay on your superannuation investment earnings differs depending on what superannuation phase you're in.

Accumulation Phase

You're still working and contributing to your superannuation fund during the accumulation phase. Investment earnings within the superannuation environment, including interest, dividends, and capital gains, are generally taxed at a concessional rate of up to 15%. Capital gains on assets held for over 12 months may even be subject to a capital gains tax (CGT) discount.¹ Franking credits from Australian company dividends can be used to offset tax payable on your super fund’s earnings.

Retirement Phase

The retirement phase begins when you start drawing a pension or income stream from your superannuation fund. This typically happens once you reach your preservation age (age 60) and retire.

Investment earnings in the retirement phase are generally tax-free. This means that any income generated by your superannuation investments, including interest, dividends and capital gains, is not subject to tax.

If you start a Transition to Retirement Income Stream (TRIS) while you're still working¹, the investment earnings on the portion of your superannuation supporting this income stream may still be taxed at 15%, similar to the accumulation phase, until you fully retire.

Tax on Super Withdrawals

Tax on super withdrawals depends on your age, the type of withdrawal (lump sum vs. income stream) and the components of your superannuation balance.

Withdrawal Options

When it comes time to access your super to fund your retirement, you can choose to withdraw a lump sum or a super income stream.¹

As the name suggests, a lump sum allows you to withdraw some or all of your super savings into a bank account. With a lump sum, you can withdraw as much or as little as you need, whenever you like. 

Alternatively, you can turn your super payments into a regular income stream (otherwise referred as superannuation pension) from your super to your bank account. You can tailor the amount and frequency of these super payments to suit your needs, however, pension payments are subject to legislative annual minimum amounts.

Tax Rates Based on Age and Status

Your age and your superannuation status play a key role in how your super is taxed.

Here's how lump sum payments are generally taxed based on your age:

• Under preservation age: you may be up for either 22% (including the Medicare levy) or your marginal tax rate, whichever is lower.
• Over 60 years old: Your lump sum is generally tax-free when you withdraw from a taxed super fund. But, you may pay tax if you withdraw from an untaxed super fund, like a public sector fund.

As for super income streams:

• Under preservation age (60 years old): If you experience permanent incapacity, you may receive the same tax treatment as people age 60. If you tap into your super early due to compassionate grounds or hardship reasons, your income payment would generally have two parts:
  • Taxable - generally taxed at your marginal tax rate, and
  • Tax-free - you may not have to pay anything more.
• Over 60 years old: You may be able to enjoy tax-free benefits from a taxed super fund.

Do note that several taxation rules apply to lump sum super payments and the above is a simple and summarised version that may not apply to your circumstances. Refer to the ATO’s website or a registered accountant for more information on the above.

Death Benefits

When a member dies, their super is typically paid to their beneficiary. This is known as a super death benefit. If you're the beneficiary, the amount of tax you pay on a death benefit generally depends on:

• Your age and the age of the deceased person when they died,
• The tax-free and taxable components of the super,
• Whether you're a dependant for tax purposes, and
• Whether you take the benefit as an income stream or a lump sum.

Superannuation-related Tax Benefits and Offsets

Low-income earners may be able to receive a payment of up to $500 under the low income super tax offset (LISTO).¹

Alternatively, if your spouse doesn't work or earns less than $40,000, you might be able to claim a tax offset if you chip in for your spouse with a spousal contribution. You need to meet a few conditions before taking advantage of this tax offset, which you can view on the ATO website or discuss with a registered accountant.

How to Make the Most of Your Super

Taxes are an unsurprising part of super, but despite that there are avenues within super that one can use to maximise the amount they may retire with.   

Salary Sacrifice

Depending on your employer, you may be able to set up a salary sacrifice arrangement to contribute part of your pre-tax salary to your super fund. 

Subject to an individual’s income needs and goals, this strategy may reduce taxable income and allow the individual to take advantage of the concessional contributions cap (i.e., contributions up to the concessional contributions cap are taxed at 15% instead of the marginal tax rate).

Personal Deductible Contributions

You can also make personal contributions to your super fund. This can be beneficial if you're self-employed or if your employer doesn't offer salary sacrifice.

Utilising Non-Concessional Contribution Cap

You have the option to make the most of the non-concessional contribution cap and chip into your super fund using after-tax income, up to the annual non-concessional contributions cap ($120,000 for FY 2025). Depending on your age and total super balance, you might also be able to take advantage of the bring-it-forward arrangement.¹

Subject to individual circumstances and investment objectives, the above strategies may not be suitable for everyone. For more information on contribution types, caps, and eligibility criteria, please refer to the ATO website or consult a registered tax accountant.