Tax on early super withdrawal

Accessing your superannuation early under compassionate grounds can be life-changing, especially when facing medical, dental, or mental health expenses. But it’s important to understand how these funds are considered by the Australian Taxation Office (ATO), and what that means for your tax return.

At SuperCare, we help Australians access their super legally and responsibly. That includes making sure you understand the tax implications before you apply.

The tax treatment of your early super payment depends on your age and the composition of your super balance.

When you access your superannuation early, your payment is made up of two parts:

– Taxable Component:

Includes employer contributions and investment earnings. This is the portion that may be taxed when paid out.

– Non-Taxable Component:

Generally made up of your personal after-tax (non-concessional) contributions. No tax is payable on this amount.

NOTE: Your super fund will calculate these amounts, withhold the applicable tax, and remit it directly to the ATO. You will receive the net balance.

If You’re Under 60:

For most superfund members the taxable portion of your withdrawal is taxed at the lower of your marginal tax rate or 22% (including the Medicare Levy).
– Most Australians are members of a taxed fund (Retail or Industry Superfunds), where contributions and earnings have already been taxed at 15%.
–  If your superannuation comes from a government or public sector “untaxed” fund, the taxable portion may be subject to a higher rate of up to 32%.
–  Your fund will issue a Payment Summary – Superannuation Lump Sum (or make it available via myGov) showing how much tax was withheld.
–  The taxable amount will be prefilled in your tax return under “Australian superannuation lump sum payments”.

If You’re Over 60:

–  Most early super payments are tax-free if your fund is a taxed fund.
–  You don’t need to pay tax or include the amount as income in your return.
–  Your fund may still report the payment to the ATO, but it won’t affect your tax.
–  If your super is from a government or untaxed fund, part may be taxed at up to 17%.
–  Your super fund will advise if this applies and will withhold any applicable tax before releasing your payment.

Example Scenario

Michael is 52 years old, he is a member of a “taxed fund”. He has a super balance of $100,000 made up entirely of employer contributions and earnings (no after-tax contributions). He needs $25,000 to pay for urgent dental surgery. He applies for early access to his superannuation under compassionate grounds, with SuperCare’s assistance.

• Because Michael has made no personal after-tax contributions to his Super, the entire amount will be released from a taxable component of his Super.
• His super fund will release the $25000 required for his dental surgery to Michael’s nominated bank account.
• Michael’s super fund will calculate and remit the 22% tax withholding to the ATO. In this example the tax withheld would be $7,051 — that is 22% of the gross withdrawal of $32,050 (the gross equals the $25,000 requested plus the $7,051 tax).
• When Michael lodged his tax return, he will have to report the total amounts released from his superfund (the treatment cost and the tax withholding) as lump-sum income in his tax return for that financial year.
• He’ll be taxed at either his marginal tax rate or 22%, whichever results in a lower liability. (The ATO caps the taxed element of your super
  withdrawal at 22%, so you don’t pay more than that.)
• Because the payment is included in his assessable income, it may temporarily affect certain means-tested benefits such as Family Tax Benefit or Medicare Levy surcharge.

NOTE: Super funds generally withhold 22% of the taxable component when they pay an early-release lump sum; your final tax is reconciled when you lodge your tax return and any excess withholding will be refunded if your marginal rate is lower.

How SuperCare supports you.

At SuperCare, we go beyond completing forms, we help you understand every part of the process.

Our team ensures:

• Your application is compliant with ATO guidelines.
• You receive and submit clear and correct documentation.
• You receive both verbal and written information outlining how the tax applies to early access to super.

Independent advice and example-only notice

Please seek independent, professional financial advice before making any decisions. The example scenarios on this site are for illustrative purposes only and are not financial, tax, or medical advice. For authoritative guidance on the tax treatment and process for early release of superannuation, please refer to the Australian Taxation Office website.

SuperCare does not provide health, financial, or tax advice. Information shared through our communications is purely informational and should not be construed as medical, financial, or tax guidance. You should obtain independent professional financial and tax advice tailored to your circumstances before acting on any information provided here. Please note not all treatments or conditions qualify for early release of superannuation; eligibility is assessed by the ATO and your super fund. This example scenario is provided for illustration only and does not constitute advice. For further details on the tax implications and official rules governing early release of superannuation, please consult the ATO guidance.