This explainer, published by the Australian Parliament Budget Office (PBO), is the first in a 2-part series about taxes on superannuation (or super). Unlike most OECD countries, in Australia taxes apply as fund members’ balances increase during their working lives rather than as pensions are drawn out of the fund after retirement. This means that the timing of contributions matters for how much tax is paid. Contributions made earlier in a person’s accumulation phase are more affected by taxes than those made closer to retirement. In addition, amounts entering funds are largely all taxed at the same rate, in contrast to the progressive rates of the personal income tax system.
Super is a long-term savings vehicle that contributes to 2 of the 3 pillars of Australia’s retirement income system: compulsory and voluntary savings. The other pillar is the Age Pension.
The super guarantee (SG), introduced in 1992, greatly expanded the number of people with access to super, to virtually all employees now. The expansion in coverage, combined with tax incentives for voluntary contributions, has built a sector with total assets worth $3.4 trillion (150% of GDP) as at December 2022 – a pool of savings that supports Australians in retirement.
From a fiscal perspective, super is an important source of Australian Government revenue, accounting for around 5% of total tax revenue in 2021-22. This is the fifth largest source behind personal income tax, company tax, goods and services tax (GST) – which is passed to the states and territories – and customs and excise duties. Super is taxed concessionally, which means that it is taxed less than many other forms of income. The tax treatment of super has undergone a number of changes over the last 40 years, often to limit the availability of tax concessions.
In general there are 3 points at which super can be taxed: contributions, investment returns on super assets (earnings), and withdrawals. The current system taxes most SG contributions and voluntary (before tax) concessional contributions at a flat rate of 15% up to the concessional contributions cap ($27,500 in 2022-23). Non-concessional contributions are made after an individual has already paid personal income tax. Earnings are also taxed at a flat rate of 15%. In retirement, earnings (if they are held in a retirement-phase account) and withdrawals (since 2007) are untaxed.
The tax concessions on super aim to encourage individuals to save for retirement, but higher-income earners typically benefit from these concessions more than lower-income earners. This is because the difference between an individual’s marginal tax rate and the flat tax rate on super increases as their income increases. In 2019-20, around 30% of the value of tax concessions on super contributions were received by the highest 10% of earners.
In contrast to Australia, many other OECD countries do not tax contributions or earnings in their equivalent retirement-income schemes. Instead, these countries only tax withdrawals. When the SG was introduced in 1992, taxing contributions and earnings had the effect of raising revenue sooner than taxing withdrawals.
The trade-off, however, is that taxing contributions and earnings at the same rate for most taxpayers can make the super system less progressive. In addition, the compounding impact of taxes on earnings is larger for contributions made early in an individual’s accumulation phase than for those made for an individual close to retirement.
The second explainer in this series (forthcoming) will explore the longer‑term fiscal impacts of the super system, in particular its interactions with the Age Pension and integration into the retirement-income system as a whole.
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