What is the untaxed super component in Australia?
The untaxed super component in Australia is a part of superannuation benefits where contributions and/or earnings were not taxed within the super fund before being paid out. It is primarily found in older public sector and defined benefit schemes.
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How it works in practice
Understanding the Untaxed Super Component
The untaxed super component refers to a portion of your superannuation benefit that has not had tax paid on it by your super fund. This contrasts with the taxed component, where the fund typically pays 15% tax on contributions and investment earnings. The untaxed component often arises from certain defined benefit super funds, particularly older public sector schemes, where the employer's contributions and earnings were not taxed until the benefit is paid to the member.
How it Affects Your Payout
When you withdraw your super, the untaxed component is generally subject to different tax rates compared to the taxed component. If you are under age 60, or even over 60 but the untaxed component exceeds a specific cap, it will be taxed. For those aged 60 and over, the taxed component of a lump sum is generally tax-free. However, the untaxed component will still be taxed at up to 15% for amounts up to the untaxed plan cap and 45% (plus Medicare levy) for amounts above the cap, when taken as a lump sum. This taxation structure means it's crucial to understand your super components when planning retirement withdrawals.
Why it's Important to Identify
Identifying whether your super benefit includes an untaxed component is vital for financial planning, especially when contemplating retirement or accessing your super. The tax treatment can significantly impact the net amount you receive. Your super fund statement or a consultation with a financial advisor can help clarify the breakdown of your super balance into its taxed and untaxed components, ensuring you can make informed decisions about your retirement savings.
Important exceptions
The specific tax treatment of the untaxed component depends on several factors, including your age when you receive the payment and whether it's paid as a lump sum or a super income stream (pension). For lump sums, the untaxed plan cap applies, with amounts above it taxed at a higher rate. If paid as a pension, the untaxed component is typically taxed at your marginal tax rate, with a 10% tax offset applied for those aged 60 or over. These rules do not apply to all super funds, predominantly affecting members of older public sector or defined benefit schemes.
What you should do now
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Review your superannuation statements carefully for any mention of untaxed components.
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Contact your super fund directly to request a breakdown of your taxed and untaxed components.
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Consult with a qualified financial advisor to understand the tax implications for your specific situation.
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Familiarise yourself with the ATO's current tax rates for superannuation lump sums and pensions.
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Plan your super withdrawals considering the tax impact of any untaxed component to maximise your net benefit.
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