It may come as a surprise, but the amount of super tax you pay may be much higher than the headline rate of 15 per cent that is often used to illustrate the disparity between super and marginal tax rates – and recently to justify the introduction of a new tax on balances above $3 million.

Super tax has many more layers; just like the simple premise of the game of Jenga, stacking tax upon tax can unsettle an individual’s retirement savings plan.

Further, just as each Jenga block is subtly different in dimensions to add to a tower’s instability, so is each taxpayer’s circumstances when planning for retirement.

Let’s look at Harrison and Carrie, a couple who are members of the Lucas SMSF, with four school-aged children aged between nine and 17.

Harrison, 49, and Carrie, 45, are employed and receive employer super guarantee contributions. These are concessional contributions that include salary-sacrifice contributions and personal deductible contributions, all of which are taxed at 15 per cent.

Harrison earns a salary of $150,000 and has fringe benefits of $23,500. His employer’s SG contributions for the income year are $17,600.

Harrison also makes additional personal contributions of $9,900 to utilise his full concessional contribution cap for the income year and claim a tax deduction. He also has personal investment income and capital gains for the income year totalling $80,000.

Carrie works part-time and earns $85,000 plus her employer’s SG contributions. During the year, Carrie sold her investment property for an assessable capital gain of $225,000. Carrie’s total super balance is below $500,000, and she has an unused concessional contributions cap available.

As she has been out of the workforce, she makes a personal concessional super contribution of $50,000 to boost her super. Carrie is also eligible to claim a personal tax deduction for her $50,000 contribution that will help offset her taxable capital gain.

$250,000 problem

Despite being within their contribution limits, Harrison and Carrie will be liable for an extra 15 per cent tax on their super contributions as “higher income earners”. This is because their individual adjusted taxable income plus taxable super contributions for the income year exceeds $250,000.

A person’s adjusted taxable income includes their taxable income, reportable fringe benefits and the add back of any net investment losses such as negative gearing losses.

This additional taxation comes as a personal tax bill, but they can elect to have the tax payment released from their super.

The one-off event arising from the sale of her investment property means Carrie’s adjusted taxable income will exceed $250,000. All her employer and personal concessional contributions will be subject to the additional tax.

Both Harrison and Carrie’s contributions have now been taxed twice, with no consideration given to their super balance, cyclical earning capacity or any time taken out of the workforce.

The Lucas SMSF invests Carrie and Harrison’s contributions. These earnings, including capital gains, will be taxed at a maximum rate of 15 per cent. For some capital gains, the effective tax rate will be 10 per cent as a one-third discount will apply to gains on assets held for more than 12 months.

Concessional contributions, the income the fund generates and the growth in the value of the fund investments will all increase the taxable component of Harrison and Carrie’s member account balances. This will be important when the taxation of benefit payments is examined.

A tax-free component is created where tax-free contributions – such as personal non-concessional contributions, small business capital gains tax concessions or contributions from qualifying personal injury compensation payments – are made. These amounts are fixed and do not benefit from the fund’s earnings or growth.

When benefits are withdrawn from super, they are taken proportionately from the taxable and tax-free components of the member account balance. The tax-free component will always be received as a tax-free benefit. The proportion of the benefit comprising the taxable component will also be received tax-free if paid to a member after 60.

However, the proportion of the benefit which comprises the taxable component will be subject to 15 per cent tax if, on the member’s death, the benefit is paid to a non-tax dependent as a lump sum. Carrie and Harrison’s children would ordinarily be classified as non-tax dependents if on the death of Carrie or Harrison they are over 18 and no longer financially dependent on the deceased.

What if Harrison has an accident and is disabled? To provide ongoing income for his family, he begins a pension from the Lucas SMSF. Despite his circumstances, because he is under 60 the taxable portion of his pension benefits will be taxed at his personal marginal tax rate. But he will be entitled to a 15 per cent tax offset as a disability benefit.

If Harrison dies and his benefits are paid to Carrie as a pension, as they are both under 60 the taxable component will be taxable at Carrie’s personal marginal tax rate (plus Medicare levy). No tax offset will apply.

Now the government’s proposal to apply an additional 15 per cent on earnings attributable to balances over $3 million needs to be added to the mix.

Insurance payout

If Harrison held a total and permanent disability insurance policy in the Lucas SMSF, and the insurance proceeds cause his personal total super balance to exceed $3 million, he will be required to pay additional tax on the assessed earnings.

This is a very real scenario for couples who individually are below the proposed tax threshold but on the death of a spouse, receiving a death benefit pension will cause them to exceed the threshold, and be subject to additional tax.

Playing Jenga might be fun, but playing with someone’s retirement savings isn’t a game and the super system would benefit from simplification – not the stacking of more taxes.