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Superannuation is a tax-advantaged retirement savings arrangement where employers, employees, and those who are self-employed make contributions for fund members. The reason superannuation is considered to be a tax-advantaged arrangement is because tax concessions are available at the time some contributions are made to the fund, the income on the fund's investments is taxed concessionally and lump sums or pensions can be taxed at low rates or tax-free.
Concessional contributions include:
Contributions made by your employer, either:
employer compulsory super guarantee (SG) contributions
contributions made under a salary sacrifice arrangement
Personal contributions are claimed as a tax deduction.
For most people, concessional contributions are taxed at 15%. There is a standard maximum cap of $25,000 (indexed) that can be contributed in total each year.
However, for anyone with a total superannuation balance of less than $500,000 on 30 June in the previous financial year, it is possible to bring forward any unused concessional contributions since 1 July 2018 for up to 5 years.
Any contributions above the person’s concessional contributions cap plus an interest rate penalty are included in their assessable income and taxed at their marginal tax rate.
Non-concessional contributions are personal contributions (made from after-tax dollars) where the member does not claim a tax deduction. No tax is applied to non-concessional contributions up to the cap amount.
The cap amount depends on how much a person has in superannuation as at 30 June in the previous financial year. For anyone with a total superannuation balance of at least $1.6 million, the cap amount is $NIL. The standard non-concessional cap amount for anyone with a balance of less than $1.6 million is $100,000 (indexed) and it is possible to bring forward non-concessional contributions for up to three years for anyone under 65 years old.
Earnings within an SMSF
For a fund that is in the accumulation phase, income earned on investments within an SMSF is taxed at 15%. Franked dividends paid by an Australian company may entitle the SMSF to a tax credit, reducing their overall income tax rate. Capital gains on assets held for 12 months or more are taxed at 10%. Capital gains on assets held for less than 12 months are taxed at 15%.
Income earned on investments that are supporting retirement phase pensions is tax exempt. There is a Transfer Balance Cap of $1.6 million which applies to the amount that can be used to commence superannuation pensions that are in the retirement phase.
Superannuation lump sum payments
A superannuation lump sum paid to a member aged 60 years or over is tax-free. But for those under 60 years old, some tax may be payable. It depends on the amount and the member's age. A superannuation lump sum benefit can comprise of both taxable and non-taxable components, depending on the composition of the Member's benefit.
Pensions paid to a member 60 years or over are tax-free. For persons under 60 years old, the taxable pension is taxed at their personal marginal tax rates and a tax offset may be available.
Don't take your money from the fund early
If you take your money from your SMSF earlier than the superannuation rules permit the amount withdrawn can be taxed at penalty rates, the fund loses its tax concessions, and the trustees are penalised for allowing the money to be released early. It is illegal to access superannuation early.