Superannuation and Tax: Understanding the Connection

Superannuation is much more than a retirement savings vehicle; it is one of the most tax-effective ways to build wealth in Australia. Understanding how super is taxed at each stage, from contributions to withdrawals, can help you maximise its benefits and reduce your overall tax burden. This guide explains the tax implications of superannuation for Australian workers in 2025-2026.

How Superannuation Is Taxed

Superannuation enjoys concessional tax treatment compared to other investments. Tax applies at three stages: when money goes in (contributions), while it is invested (earnings), and when it comes out (withdrawals). At each stage, super is taxed at rates lower than most individuals would pay on the same amounts outside of super.

This favourable treatment is designed to encourage Australians to save for retirement, reducing reliance on the age pension and enabling people to maintain their living standards after they stop working. However, the rules are complex, and understanding them is essential for making the most of your super.

Types of Contributions and Their Tax Treatment

Contributions to superannuation fall into two main categories: concessional (before-tax) and non-concessional (after-tax). Each type has different tax implications and contribution caps.

Concessional contributions include employer super guarantee payments, salary sacrifice contributions, and personal contributions for which you claim a tax deduction. These contributions are taxed at 15% when they enter the fund, which is significantly lower than most people's marginal tax rate. For 2025-26, the concessional contribution cap is $30,000 per year.

Non-concessional contributions are made from after-tax income, meaning you have already paid income tax on these funds. They are not taxed again when entering the fund. The non-concessional cap is $120,000 per year, or you can bring forward up to three years of contributions ($360,000) if you meet certain conditions.

The Super Guarantee and Tax

Most employers must pay at least 11.5% (for 2025-26) of your ordinary time earnings into super. This is called the super guarantee. These payments are concessional contributions and are taxed at 15% inside your super fund.

The super guarantee is not included in your assessable income for personal tax purposes. Instead, it goes directly from your employer to your super fund. However, it does count toward your $30,000 concessional contributions cap, which is important to remember if you also make salary sacrifice contributions.

Salary Sacrificing into Super

Salary sacrifice allows you to have additional contributions made to super from your pre-tax salary. This reduces your taxable income and therefore your income tax, while the contributions are taxed at just 15% in the fund.

For example, if you earn $100,000 and salary sacrifice $10,000 into super, your taxable income becomes $90,000. At the 30% marginal rate (plus 2% Medicare), you save $3,200 in income tax and Medicare levy. The super fund pays $1,500 in contributions tax (15% of $10,000), leaving a net benefit of $1,700, while also boosting your retirement savings.

Salary sacrifice works best for those in higher tax brackets, where the difference between their marginal rate and the 15% super rate is greatest. For someone in the 45% bracket, the tax savings are even more significant.

Personal Deductible Contributions

If you cannot salary sacrifice (for example, if you are self-employed or your employer does not offer it), you can make personal contributions to super and claim a tax deduction. The effect is similar to salary sacrifice: your taxable income is reduced, and the contribution is taxed at 15% in the fund.

To claim the deduction, you need to submit a Notice of Intent to your super fund and receive an acknowledgment before lodging your tax return or before the contribution is withdrawn or rolled over. This is a crucial administrative step that many people miss.

Earnings in Super

Investment earnings within superannuation (interest, dividends, and capital gains) are taxed at a maximum of 15%. Capital gains on assets held for more than 12 months receive a one-third discount, effectively reducing the rate to 10%.

Compare this to earnings outside of super, which are added to your assessable income and taxed at your marginal rate. For someone in the 37% tax bracket, the difference between 15% and 37% on investment earnings is substantial over time.

Once you reach retirement and convert your super to a pension, earnings in the pension phase are tax-free (subject to transfer balance cap rules). This makes super particularly powerful for long-term wealth building.

Division 293 Tax for High Earners

If your income plus concessional super contributions exceeds $250,000, you may be subject to Division 293 tax. This is an additional 15% tax on concessional contributions, bringing the total tax on those contributions to 30%.

Even at 30%, super contributions remain tax-effective for high earners who would otherwise pay 45% (plus Medicare levy) on that income. The ATO assesses Division 293 liability after you lodge your tax return and issues a notice. You can choose to pay from your super fund or from personal funds.

Carry-Forward Contributions

If you have not used your full $30,000 concessional cap in previous years, you may be able to carry forward unused amounts. This rule allows you to make catch-up contributions in a later year, which is particularly useful if you have a windfall or want to boost your super before retirement.

Carry-forward applies to unused cap amounts from 2018-19 onwards, and you can carry them forward for up to five years. To be eligible, your total super balance at the previous 30 June must be less than $500,000. This is a valuable strategy for those who have had interrupted careers or variable incomes.

Spouse Contributions

Making contributions to your spouse's super can provide tax benefits if your spouse earns less than $40,000 per year. You can receive a tax offset of up to 18% on contributions up to $3,000, meaning a maximum offset of $540.

These contributions are non-concessional for your spouse, so they count toward their non-concessional cap, not yours. This strategy helps build your spouse's super balance while providing you with a tax benefit.

Tax When You Withdraw

The tax on super withdrawals depends on your age and the type of withdrawal. For most people who wait until they reach preservation age (between 55 and 60 depending on when you were born) and are retired, withdrawals are tax-free once they turn 60.

Before age 60, lump sum withdrawals may attract tax, though the first $235,000 (2025-26 threshold) of the taxable component is tax-free. Income streams from super before age 60 are taxed at marginal rates with a 15% tax offset.

There are strict rules about accessing super early. Generally, you cannot withdraw until you meet a condition of release such as reaching preservation age and retiring, or reaching age 65 regardless of work status.

Conclusion

Superannuation offers significant tax advantages that compound over time. Understanding how contributions, earnings, and withdrawals are taxed helps you make informed decisions about building your retirement savings. From salary sacrifice to spouse contributions and carry-forward rules, there are multiple strategies to maximise these benefits.

While the tax on super is generally favourable, everyone's situation is different. Consider seeking professional advice to ensure you are making the most of super's tax advantages for your circumstances. To understand your current income tax situation and how super contributions might help, try our free Australian tax calculator.