How Does Tax Apply To Your Super?

I often get questions for the newspaper column relating to how tax applies with regards to superannuation. In the past year I’ve produced a couple of episodes that have elements of superannuation and tax in them, most recently the Superannuation Contribution Master Class episode, but also the Superannuation Sweet Spot episode. Given the volume of questions that I get however, I thought I might devote an episode purely to tax as it applies to superannuation, since this appears to be an area that causes some confusion.

Wanting to get your head around tax within the superannuation system makes total sense. Our savings accumulate in this regime, however there are restrictions on how we can access the money, and for the vast majority of us, we are forced to save into this vehicle. How does a government manage to force people to save? Sure they can legislate, but in a democratic society, that won’t produce a lasting impact. The population needs to be on side, and simply being told it’s for your own good isn’t going to cut it. The carrot then, is tax concessions.

The primary distinction between you building up an investment portfolio in your personal name, versus building the same amount of wealth up in your superannuation account, is the tax that is applied. The interaction therefore of taxation and superannuation is central to wealth creation and gaining choice through achieving financial autonomy.

The tax regime in superannuation operates within two distinct phases. Phase one is the accumulation phase. This is the time when you are contributing to your superannuation savings and building your retirement wealth.

Phase 2 is the pension phase, the point beyond which you have retired and are drawing down your retirement savings to meet your living costs.

The tax treatment in each of these two phases is very different.

Accumulation phase

When your employer contributes to your super fund, or you make personal super contributions for which you claim a tax deduction, 15% tax is applied to the money that has been deposited.

Salary sacrifice falls within this contribution type. One of the most common questions that I get is whether it makes sense for an individual to salary sacrifice to superannuation. To answer this question we need to understand whether your personal tax rate is less than, or more than, 15%. For someone who pays no personal tax, perhaps because they have low income, salary sacrificing to superannuation would be inadvisable. They’d be paying 15% tax on the money that they send to super, whereas had they simply retained the money for themselves, or put it into super as an after tax contribution, that tax would not have applied.

Someone earning between $18,000 and $45,000 will be paying 16% tax on the portion of their income between this band. For people in this range, salary sacrificing to super may not make a lot of sense, as the tax saving is a mere 1%, whilst they have lost access to their savings until they are at least 60 years of age.

Because of the tax that applies to superannuation contributions, salary sacrificing to superannuation only usually makes sense for those with taxable income above $45,000.

For those with income above $250,000, an additional tax of 15% is applied to contributions. This is known as division 293 tax. People at this income level therefore end up paying 30% tax on their superannuation contributions, which remains attractive given that were they instead to receive this money as cash in their hand, they would have had to pay 45% tax plus Medicare levy. Nonetheless, no one looks forward to getting a Div 293 tax bill.

Beyond contributions, whilst your superannuation is in the accumulation phase, all investment earnings are taxed at 15%, whilst any capital gains that occur, are taxed at 10%.

In summary then, during the accumulation phase, superannuation is favourably taxed, but certainly taxed nonetheless.

Pension Phase

If you listened to the superannuation sweet spot episode, you will recall that the pension phase is where superannuation really shines. Provided you are within the transfer balance cap, which we’ll get to in a moment, then you are in tax free Nirvana. In pension phase, investment earnings are taxed at 0%, capital gains are taxed at 0%, and your drawings are taxed at 0%.

The only tax that might apply is on money leftover when you pass away. It remains tax free if that money goes to your spouse, however where it passes through to adult children, there will usually be some tax payable at that point.

I mentioned the caveat just now that this was all provided you were within the transfer balance cap. The transfer balance cap is the maximum amount permitted for people to hold within a tax-free superannuation pension. Right now, in early 2025, that cap is $1.9 million. It is expected to be indexed up to $2,000,000 next financial year.

If you have superannuation savings beyond this level, then you’re unable to put them into a tax-free pension, and they will likely remain within the accumulation phase. For someone with wealth at this level, that usually remains quite attractive tax wise, as 15% tax on earnings is still quite good compared to their alternative marginal tax rate. But it’s a case by case thing.

So there you have it. When thinking about tax within superannuation, start by delineating between accumulation phase and pension phase. Accumulation phase gets favorable tax treatment, but some tax is still payable. Whilst in pension phase, for the most part, it is fairly simple. Everything is tax free.

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