The 3 Stages of Tax with Retail Superannuation Funds
Taxation is a complex area, but it is important for you to have a general understanding of how it works and in this article, we will cover the main tax ‘trigger’ points, when saving for retirement using a Retail Superannuation Fund.
Generally speaking, the tax treatment of your Superannuation Fund is broken down into 3 stages:
Stage 1: When you contribute to your Super
If you make a personal contribution to your Super, this will be classed as a ‘Concessional’ contribution and a tax charge of 15% will apply to it. You can opt to pay the tax yourself but this will be at your Marginal Tax Rate (income tax rate), which in some cases could be higher than 15%.
If you opt for the retail superannuation provider to pay on your behalf, they will do so at a fixed rate of 15%, which will be deducted from the contribution and paid to the Australian Tax Office (ATO) before applying the rest of the contribution to your super fund.
You should make sure that you understand the limits that apply as if you contribute more than the $25,000 limit, in any given financial year, an excess charge may apply. For more information, check out our article Contributing to Your Superannuation Fund.
Stage 2: The investment growth within your Super
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When you are contributing to your Super and it is benefiting from investment growth, this is known as the ‘Accumulation Phase’. The investment earnings (growth) is generally taxed at 15% and this will also be calculated and paid on your behalf by the retail provider. This will also be in the form of automatic deductions from your fund.
You should also be aware that if you switch funds within your super you may be liable to Capital Gains Tax if a gain has occurred within the fund you are switching out of. Capital Gains Tax is charged at 15% if the fund has been held for less than 12 months. For funds held longer than 12 months, a 5% tax deduction will apply meaning that only a 10% charge will apply.
Stage 3: When you withdraw funds from your Super
Once you reach your preservation age, provided that you meet a ‘release condition’ you can flexibly withdraw funds from your Super. Whether you choose to do so as a lump sum or in the form of regular income payments, you should be aware of the potential tax implications. Withdrawing funds from your Super once you have reached your preservation age is known as the ‘Pension Phase’. In UK terms, this is the same as ‘Income Drawdown’.
There are various scenarios to consider where tax is treated differently, depending on your age.
If you withdraw funds before your preservation age based on special circumstances (i.e. serious ill health), the tax will be applied at 20%, which also includes a Medicare Levy.
From your preservation age to age 60, the tax on the withdrawal is 0% on the first $205,000. Withdrawals above this threshold are taxed at 15%.
Any withdrawals after you reach age 60 will generally be tax-free.
The tax treatment of superannuation funds in Australia is a complex area so you should always seek professional tax advice if you are unsure of your position or if you do not understand the rules. Whilst we can always provide general guidance on the rules, but we are NOT authorised to provide any personal advice in relation to your circumstances.
If you would like some guidance, please do not hesitate to contact us and a member of our team would be happy to help.
This article does not contain personal or financial advice. It is provided for general information only and does not take into account your personal objectives, financial situation or needs. IVCM is not authorized to provide you with any personal or financial advice.
If you require financial any advice then you must make sure that you obtain advice from a suitably qualified financial adviser.