Australian superannuation - how it works


This is an attempt to provide a simple guide to the Australian superannuation regime with particular regard to self managed superannuation funds (SMSFs).

If you are thinking of establishing an SMSF but know little about how pensions work in Australia, I hope this article will act as a starter for you.

The basic concept

The basic concept of the Australian superannuation regime is straightforward: during your working life you can put sums and assets in a superannuation fund, subject to caps. If you are employed, your employer is obliged to make superannuation fund payments for you (you do not pay personal tax on this money). You can also make your own contributions and up to an annual cap you may deduct these from your income and therefore reduce your personal tax bill.

Generally you can't withdraw from the fund until you reach a certain age or retire. Whether you have to take a pension or whether you can withdraw all the money, and whether you have to pay any tax on the withdrawal depends on your age and whether you have retired. If you are between "preservation age" and your 65th birthday and still working you can take a "transition to retirement" pension with a minimum and maximum annual withdrawal, but if retired or aged 65 or over you can withdraw as much as you like as a lump sum or take a pension with a minimum annual withdrawal or you can take both. If you are not yet 60 when you take the money out, part will be taxable but significant tax concessions apply; after the age of 60 withdrawals are tax free. The basic aim is to provide you with a decent level of capital and income later on in life.

As for the internal tax treatment of the fund, before the fund starts to make any payments to you, it pays tax of 15% on its income. The fund also pays tax at 15% on contributions into the fund where the source of the contribution is untaxed money (except for high earners when it is 30%). After the fund starts making payments to you, provided you have retired or have reached 65, it will usually not pay tax on the income from the assets set aside to enable those payments to be made.

There will be a time in which in your personal circumstances, you can take a pension from your superannuation fund but at the same time make contributions to the fund. This is perfectly legitimate but the contributions must go into an accumulation account (they must not be added to the account from which your pension is being paid). The accumulation account can be used later to start a new pension, or added to your existing pension account.

The Self-managed Superannuation Fund

An SMSF is a superannuation fund which you yourself can manage directly, and act as its trustee. Some people are happy to manage all aspects of their SMSF, dealing with all paperwork, making all investment decisions, carrying out all transfers and transactions, preparing their own accounts and submitting their own fund's tax returns to the Australian Tax Office (ATO). If they do this, they are independent from all except the professional auditors required for the obligatory annual audit.

I am a barrister practising in Australia and I am one of those people who manage all aspects of my own SMSF. This is of professional interest to me. My trust deeds, corporate constitution and guidance packs are on sale on this site. My aim is to provide these documents (and if necessary to provide further advice) at a reasonable cost to those who wish to set up and run an SMSF.

You may prefer to engage a professional to do some or part of the work. In Australia there is quite an industry in offering SMSF services - lawyers, accountants, financial planners, investment advisers, and SMSF administrators. But such professionals do not become trustees of the SMSF, nor take over the trustees' responsibilities - the responsibility will always remain with you.

The pension scheme in more detail

There are five tables below which help to explain how things work and you can follow the definitions of the words and phrases used in the table. Please note that there will always be exceptions to the rule, and changes, so do not regard the information here as definitive. You need to check the position from current ATO material.

You can start with the age table. This is because it is the age of the member of the superannuation fund which largely determines how the fund must operate with respect to that member, and what contributions and receipts are permitted.

Then move on to the contributions table. This explains how each type of contribution is dealt with for tax, and the caps which apply.

Then there is the pensions table. This shows how each type of pension is dealt with for tax, and the rules which apply to them.

There is also the internal taxation table and a table showing the benefits payable on death of the member.

Age Table
Permitted contributions and withdrawals by age
Age range Permitted contributions Permitted withdrawals
0 to preservation age any (except downsizer contributions) exceptional circumstances and employee's life pension only
preservation age to 59 whilst still working, a transition to retirement (TTR) pension or
upon retirement, a lump sum or retirement phase pension
at this age, the taxable part of the income stream (or lump sum subject to a threshold) is taxable at a concessionary rate in the hands of the recipient
60 to 64 whilst still working, a transition to retirement (TTR) pension or
upon retirement or assumed retirement, a lump sum or retirement phase pension
at this age, all receipts are tax free in the hands of the recipient
65 or 66 mandated employer, downsizer, non-mandated employer and member contributions lump sum or retirement phase pension.
all receipts are tax free in the hands of the recipient
67 to 74 mandated employer or downsizer contributions
if work test is satisfied: non-mandated employer and member contributions
see the work test exemption
75+ mandated employer or downsizer contributions

Exceptional Circumstances

In exceptional circumstances a condition of release will be satisfied. They are:-
  1. death;
  2. terminal medical condition;
  3. permanent incapacity;
  4. the permanent departure from Australia of former temporary resident who has established an Australian superannuation fund;
  5. being a lost member who is now found and the fund is less than $200.

And the following events will enable part of the fund to be paid out to a member:-

  1. if a payment is required or approved by the Commissioner of Taxation (ATO);
  2. severe financial hardship (the amount withdrawn may be subject to minimum and maximum limits, depending on the circumstances);
  3. compassionate grounds (the amount withdrawn will be subject to control by the ATO and depends on the circumstances);
  4. temporary incapacity (the money must be taken as an income stream to compensate for loss of earnings during the incapacity).

Employee's Life Pension

On leaving an employment at any age, it is lawful to withdraw the contributions that your former employer made into your superannuation fund. In the case of employer's contributions made before 1 July 1999 these can be taken as a lump sum (they are restricted non-preserved benefits).
In the case of employer's contributions made after 1 July 1999, these can only be taken by non-commutable life pension or annuity and not by way of lump sum (unless the lump sum would be less than $200).
[This may be regarded as an anomaly but it is permitted by item 108 in Schedule 1 of the Supervision Industry (Supervision) Regulations 1994. It seems to be discouraged by employer's superannuation schemes but it could be permitted by your SMSF if it received employer contributions].

Preservation Age

This is the age when you can start to withdraw from your superannuation fund. Your preservation age is based on your date of birth as follows:-
before 1 July 1960 55
1 July 1960 to 30 June 196156
1 July 1961 to 30 June 196257
1 July 1962 to 30 June 196358
1 July 1963 to 30 June 196459
after 30 June 196460
So the earlier rows in the above table will disappear in due course.

Transition To Retirement (TTR) pension

This is also known as a transition to retirement income stream (TRIS). It can be started whilst still working and between preservation age and your 65th birthday. See below for the rules applying to such pensions.


This happens when the member has ceased work and the trustee is reasonably satisfied that the member intends never again to become gainfully employed, either on a full-time or a part-time basis.

Assumed retirement

There is automatically assumed retirement when an arrangement under which a member aged 60 or over was gainfully employed comes to an end. This may seem to be an anomaly, but it is provided by Reg 6.01(7)(b) of the Superannuation Industry (Supervision) Regulations 1994.

Retirement Phase pension

A pension paid from sums and assets in an account which is in retirement phase. See below for the rules applying to such pensions.

Taxable receipts when under 60

Part of the income stream or lump sum is assessed for tax when the income stream is started or when the lump sum is paid, and it is that part of the fund referable to concessional contributions (employer contributions and member contributions for which an income tax deduction has been claimed) that is taxable. For income streams, that element is taxed at the member's marginal rate but there is a 15% tax offset. For lump sums, there is a concessional tax rate of zero until the total withdrawn is $225,000 (the low rate cap).

Mandated Employer Contributions

These are the contributions to your super which an employer must make (the super guarantee contributions). The rate is currently 10%* of notional earnings. See here how these contributions are dealt with for tax.
* This is planned to increase in staggered steps to 12% by 1 July 2025.

Non-mandated Employer Contributions

They are contributions made by an employer (or an associate of an employer) over and above their super guarantee or award obligations. This will usually be in accordance with an award or a contract of employment. See here how these contributions are dealt with for tax.

Member Contributions

Member contributions are contributions not made by an employer of the member. They could be contributions by salary sacrifice if they go through payroll for an employee, or simply a lump sum paid into the fund by the member unrelated to any income or earnings of the member. While the member is under 75 such contributions can be by someone else (eg. a spouse) on behalf of the member. See here how member contributions are dealt with for tax.

Downsizer Contributions

From 1 July 2018 members of 65* and above can contribute to their super up to $300,000 from the proceeds of the one-off sale of their main residence.
* The Government plans to reduce this to 60 - see 2021 Budget.

The Work Test*

The work test is satisfied for the whole financial year if you have been gainfully employed (employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment) for at least 10 hours a week, or at least 40 hours over 30 consecutive days in the financial year; looking at the combined effect of Regs 6.01(7), 7.01(3) and 1.03 the two possibilities appear to be alternative, which may be important if an employee is off sick or on leave during a relevant time.
* The Government plans to abolish the work test for non-concessional contributions from 1 July 2022 (it will still apply to concessional contributions) - see 2021 Budget.

Work test exemption

From 1 July 2019 recent retirees aged between 65 and 74 with less than $300,000 in all Australian superannuation funds are exempt from the work test in the tax year after the tax year in which they stopped working. This exemption can only be used once in a lifetime.

Transfers and rollovers of a member's account from one Australian superannuation fund to another has a nil effect for tax and there is no applicable cap.

Contributions Table
tax treatment and the caps
Concessional contributions that is, employer contributions (both mandated and non-mandated) and member contributions. Non-concessional contributions that is, member contributions for which deduction is not claimed.
Deductible from income? Yes No
Taxed on receipt in the fund? Yes, at 15%. However, this is 30% for members earning more than $250,000 (Div 293 tax). No
Annual cap $27,500.* See also carry forward. If the member's total superannuation balance as at 30 June the previous tax year is <$1.7m* then $110,000; otherwise nil. See also bring forward.

Carry forward unused concessional cap amounts

Starting on 1 July 2018 members who have not used up their concessional cap will be able to carry them forward, provided the total super fund balance for that member is less than $500,000.

Bring forward rule

If the member is under age 67* at any time during the financial year (ie. on 1 July), then unless the member has a total superannuation balance close to the transfer balance cap of $1.7m, it is possible to use up to three years' cap all at once in that financial year under the bring forward provisions. Then the member is restricted in the contributions that can be made in the next two years.
* The Government plans to enlarge this to under age 75 - see 2021 budget.

Total superannuation balance

This is the total balance in accumulation and retirement (pension) accounts across all Australian superannuation funds.

This table does not apply to a lump sum withdrawal, however that is not always available: see the age table.

Pensions Table
the two pension types
TTR pension Retirement phase pension
Minimum pension (as percentage of pension or retirement account)* Age at later of start of pension or 1 July:-
<65  4%
65-74  5%
75-79  6%
80-84  7%
85-89  9%
90-94  11%
95+  14%
Same as TTR pension
Maximum pension (as percentage of pension or retirement account) 10% None (the whole fund can be withdrawn)
Maximum value of pension or retirement account Unlimited For new retirement phase accounts, $1.7m across all accounts (the general transfer balance cap).
For existing retirement phase accounts the cap will be between $1.6m and $1.7m depending on the amount of unused cap.
Is the pension commutable to a lump sum? No Yes
Are the capital gains and income of the pension or retirement account chargeable to tax? Yes see the internal taxation table. No
* Where the pension commences mid-financial year, the minimum payment is reduced proportionately.
These minima have been halved for the years 2019-20, 2020-21 and 2021-22 but will then revert to the usual amounts.

Pension or retirement account

When a fund is paying a pension (income stream) this is the account which holds the sums and assets in the fund set aside to pay that pension. In the case of a transition to retirement pension it is known as the pension account. If a fund is paying a superannuation income stream, that is a pension where the income and capital gains of the sums and assets set aside to pay the pension are not chargeable to tax because the fund is in retirement phase, then it is known as a retirement account.

Internal taxation of the fund

The table below is a simplification of the rules which apply and assume:-
  1. all the fund's assets have been acquired on or after 21 September 1999
  2. each member has an account balance and that any pension paid to that member is paid from that account balance.

Type of receipt Accumulation phase
(also includes a fund paying a transition to retirement pension)
Retirement phase
(this does not include a fund paying a transition to retirement pension)
Income from investments 15% No tax on income from the sums and assets set aside to provide for the income stream. This income is called exempt current pension income (ECPI).
Capital gains from investments 15% of gain upon disposal of the asset: if the asset has been held for 12 months the rate is 10%. Ignore any capital gain or loss arising from the disposal of sums and assets set aside to provide for the income stream.

Accumulation Phase

While the fund is accumulating the assets and not making payments, it is said to be in the "accumulation phase". This is also referred to as the "growth phase". In the Taxes Acts, this is referred to as the "contributions phase" and the "investments phase". Any sums and assets which are accumulating in this way are said to be in the accumulation account. This is why an SMSF is known as an "accumulation fund", that it to say it accumulates assets to be paid out on a certain event. It is not a "defined benefit fund" which is usually where the benefits follow a formula like a final salary scheme.

Retirement Phase

A fund which legitimately starts paying a superannuation income stream is said to be in "retirement phase". A superannuation income stream is a pension where the income and capital gains of the sums and assets set aside to pay the pension are not chargeable to tax. In practice a fund will be in retirement phase where it is paying a pension to a member who has retired or reached the age of 65 (or who has a terminal medical condition or is permanently incapacitated) and there is no more than $1.6m in the retirement phase account. A fund which is paying a transition to retirement pension will not be in retirement phase.

It is possible for a fund to be both in an accumulation phase (with an accumulation account) and paying a transition to retirement pension or in retirement phase at the same time. This is because the fund may receive contributions despite paying a pension. Such contributions must however, be paid in the accumulation account.

Sums and Assets Set Aside to pay the pension

These are the assets which are identified in the accounts of the fund as solely supporting the payment of the pension. In the case of a transition to retirement pension it is also known as the pension account balance. In the case of a superannuation income stream it is known as the retirement account balance. The accounts holding these balances can be segregated from other accounts in the fund if they are separately identifiable or they can be non-segregated and the proportion of the total assets of the fund that they represent can be certified by an actuary.

The procedures to be followed to identify these assets and the income derived from them are in the ATO document "Running a self-managed super fund", but are more precisely set out on the "tax professionals" area of the ATO site (search for "ECPI"). They include the need for a revaluation of all assets to their current market value before the pension payments start, and the need to follow proper accounting procedures.

Some other definitions

If a retired member returns to work after the retirement phase starts, and if the SMSF reverts back to the accumulation phase, this is called a "roll back".

Converting a pension or part of a pension into a lump sum is called a "commutation".

The pension regulations sometimes use the terms "benefits" to mean the member's account balance in the fund and sometimes to mean payments made to the member. This has the potential for confusion, so in my trust deed I have called the assets in the fund allocated to a particular member the "member's account balance". This closely follows those parts of the pension regulations which use the term "account balance". Some people use "member's accumulated benefit" or "member's account" to mean the same thing.

An SMSF therefore has a "members account balance" and an "account based pension" is a pension or income stream paid out of a fund which has a members account balance.

The following definitions are used in my trust deed to describe what happens to a member's account balance in different circumstances. These follow as closely as possible the use of these words and phrases in the superannuation legislation ("the SIS law"):-

"A member's account balance is:-
  1. cashed if it is paid by the Fund to the member or to another person in accordance with the SIS law: when this happens this is called a release or an early release;
  2. transferred if it is paid to another superannuation fund or to a Retirement Savings Account where the member has not yet satisfied a condition of release or early release under the SIS law; or
  3. rolled over if it is paid to another superannuation fund where the member has satisfied a condition of release or early release under the SIS law."
Contribution splitting is where a member splits a contribution between the member's superannuation account and to someone else's superannuation account (eg. a spouse) but claims a deduction from income for the whole contribution.

Co-contributions are where the government adds a percentage to a contribution made by a member. This might be where the member is a low earner and so is paying less than 15% tax. This is because contributions are taxed at 15% on receipt into the SMSF instead of at the member's marginal tax rate. To be eligible you must have a total superannuation balance less than the general transfer balance cap and must not have contributed more than your non-concessional contributions cap.

Preserved and non-preserved benefits

All contributions made into the Fund since 1 July 1999 and also the income of the fund itself, result in a member's account balance containing what is described as preserved benefits. This means that the account balance must be preserved for the member until he reaches preservation age. But a superannuation fund which was in existence before 1 July 1999 may contain another category of money or assets. These are called non-preserved benefits.

Non-preserved benefits can be either restricted non-preserved benefits (RNPBs) or unrestricted non-preserved benefits (UNPBs). If you are starting a new SMSF and you rollover or transfer an existing superannuation fund into your new SMSF, then you may come across money or assets which need to be categorised in your accounts in this way. UNPBs can be released to the member at any time without condition. Employer's contributions made prior to 1 July 1999 will be RNPBs. On the cessation of employment with that contributing employer, the relevant RNPBs are converted to UNPBs. So from that date they can be released to the member at any time. Prior to the cessation of that employment, they cannot be released until a condition of release is satisfied in the same way as preserved benefits.

Types of benefit payable during member's lifetime

Assuming that an event has occurred which allows a member to take benefits (as set out in the age table), then a superannuation fund may release benefits either as a lump sum or series of lump sums, or as a pension (income stream).

Lump sum or series of lump sums

On reaching 65 or on retirement, a member's account balance can be taken as a lump sum, and this can be done in one or more instalments if desired.

Pension (income stream)

As from 20 September 2007 only one type of pension can be paid by a superannuation fund and its rules are:-
  1. Except in limited circumstances the pension must be an account based pension that is, the assets held to provide for the income stream must be part or all of the member's account balance.
  2. The assets held to provide for the income stream cannot be added to by way of contribution or rollover after the pension has commenced.
  3. Pension payments must be made at least annually.
  4. A minimum amount must be paid each year. The amounts can be seen from the pensions table.
  5. The capital value of the pension and the income from it cannot be used as a security for a borrowing.
  6. The pension is transferable to another person only on the death of the member or death of the reversionary beneficiary, as the case may be.
  7. The pension cannot be commuted, in whole or in part, unless the commutation results from the death of the member or a reversionary beneficiary; or the member is entitled to take his account balance in cash (on reaching 65 or on retirement) or if the sole purpose of the commutation is:
    1. to pay a superannuation contributions surcharge; or
    2. to give effect to an entitlement of a non-member spouse under a payment split.
  8. The pension does not have to last any particular length of time, and can be stopped at any time. It can then be started again using changed level of segregated assets. If such changes are made the minimum annual pension payment will be calculated pro rata, and the fund's internal tax relief on income and capital gains in respect of the segregated assets will be interrupted.

Benefits payable after the member's death

After the death of a member of a superannuation fund, the member's account balance becomes available for distribution to others. Usually the member can specify in a Death Benefit Nomination what should happen to the account balance, and such a nomination can be made binding or non-binding on the trustee if the trust deed allows it. There may be tax consequences arising from such distributions and this should always be considered when making a nomination.

There are also some absolute restrictions under superannuation law as to how the account balance can be distributed, but assuming the trust deed allows it, the table below shows who can receive the member's account and in what form. This should be read whilst bearing in mind the definitions below the table.

Recipient Permitted benefit
deceased member's estate a lump sum
deceased member's spouse or de facto spouse lump sum or income stream or both
deceased member's child aged below 18 lump sum or income stream or both, but an income stream must cease at 25 unless the child has a permanent disability
deceased member's financially dependant or permanently disabled child aged 18-25 lump sum or income stream or both, but an income stream must cease at 25 unless the child has a permanent disability
person with whom deceased had an interdependency relationship lump sum or income stream or both
any person who was reliant on the deceased for financial maintenance at the time of death lump sum or income stream or both
any other person lump sum only

spouse or de facto spouse can include same sex couples.

child includes an adopted child, a stepchild, an ex-nuptial child of the person, and a child of a spouse and a child as a result of artificial insemination or surrogacy agreement.

An interdependency relationship exists between two people where they have a close personal relationship, and they live together, even if they are not related by family, and one or each of them provides the other with financial suppoer and also domestic support and personal care. If one person provides another with domestic support and personal care but does not satisfy any of the other tests because of physical, intellectual or psychiatric disability, this will suffice.

a person who relied on the deceased for financial maintenance

Although this category of person does not appear in the superannuation law which defines a "dependant", the ATO accept it as a separate category because there is no exhaustive definition of dependant in the legislation. So it is said that a person who relied on the deceased for financial maintenance is also a "dependant". This liberal interpretation may at some point open to challenge but it is a generally accepted view.
Note also that in the case of the death of a member prior to 1 July 2017, in certain circumstances a lump sum payment made to a spouse, a former spouse or to a child (including an adult child) of the deceased member can be increased to compensate for the contribution tax that had been paid on the member's contributions. This is called an "anti-detriment payment".

Jeremy Gordon
23 July 2021

Copyright © Jeremy Gordon

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This article only applies to Australian superannuation schemes regulated by the Australian Tax Office, which pay benefits based on the amount of the members' account balances in the scheme.

This article does not arise from any instructions from you and it is not legal advice given to you. You should check for yourself how Australian pension schemes work. If you follow the information on this page, you do so at your own risk.

(the link opens in new window)
The best source is the ATO site where you can search for the online documents:
"Running a self-managed SMSF Fund"
"Thinking about self-managed super"
"Key superannuation rates and thresholds"
These documents are usually very clear and up to date. If you are managing everything yourself I would recommend that you also read articles on the ATO site for tax professionals. These pages are equally as clear as those intended for the non-professionals, but all possible permutations and scenarios are covered. Bearing in mind that members of an SMSF have ultimate responsibility as trustees for the fund (even if they employ advisors or administrators) this will give you peace of mind. Always check the date to which a document has been updated and double check its provisions if in doubt.

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Jeremy Gordon is an Australian barrister. He can be contacted by email using
or by mail at PO Box 354 Corinda QLD 4075.
The conditions applying to his work are here (opens in new window).