“Retire from work, but not from life.” M.K.Soni, academic researcher
A client once said to us, “I just want to know what I’ll actually pay.” Fair. The problem is that tax on superannuation withdrawals isn’t a single rate – it depends on who is receiving the benefit, when, and how it’s paid.
This guide (based on Australian Taxation Office guidance) explains the common scenarios in plain English and highlights the decision points we see most often at Bishop Collins. And if you’re trying to make a call under pressure, remember our promise: You’re Not Alone In Business.
Quick answer: what determines the tax you pay?
To work out how much tax applies to your super withdrawals, you generally need to know:
Your preservation age (between 55 and 60 depending on birth date)
Your age at the time you withdraw
Whether you take a lump sum or an income stream (a super income stream)
The split between tax-free and taxable components
Whether the taxable component is a taxed element or untaxed element (common with some public sector fund arrangements)
Whether the payment is a death benefit (and who receives it)
At Bishop Collins, when clients ask “what’s the tax you pay?”, we start by mapping those variables first – because they drive everything.
First: when can you withdraw from your super fund?
You can generally only access your super fund when you meet a condition of release (for example retirement, reaching preservation age, permanent incapacity, severe financial hardship, compassionate grounds, or a terminal medical condition).
The ATO notes that the tax treatment assumes you’ve satisfied a condition of release (unless stated otherwise).
How super is taxed (the 3 points people forget)
Super can be taxed at three points in its lifecycle:
Contributions tax: employer and salary sacrifice (generally before-tax contributions) are commonly taxed at 15% in the fund, and employers who miss deadlines for these payments can face significant penalties for late employee super contributions.
Investment earnings: investment earnings in a taxed super fund are generally taxed at 15% (often lower than the tax rate on investment earnings outside super).
Tax on withdrawals: depends on age, benefit type, and components.
If your income plus before-tax super contributions exceeds $250,000, an additional 15% tax may apply to some or all concessional contributions, and higher-income earners are more likely to attract ATO attention if other audit triggers in their tax affairs are present.
Tax-free vs taxable: why you can’t “choose” the tax-free part
Most people have both a tax-free and taxable component in their super account.
The ATO applies a proportioning approach: withdrawals generally take a proportional amount from both components. In other words, you usually can’t withdraw only the tax-free component unless the entire account is tax-free.
Lump sum vs income stream: the choice that changes the outcome
You can generally withdraw as either:
A lump sum (one-off lump sum payments or multiple lump sums), or
An income stream (regular income payments, at least annually)
A retirement income stream can be tax effective after 60, but it comes with rules — including minimum annual withdrawals. If you don’t withdraw the minimum, the income stream may stop.
Scenario 1: You’re under preservation age
If you’re under preservation age, the taxable component is generally taxed more heavily.
In broad terms (and depending on whether the fund has already paid tax on the amount):
Income stream (taxable component – taxed element): taxed at your marginal tax rate (a 15% tax offset may apply for disability super benefits)
Lump sum (taxable component – taxed element): your marginal tax rate or 22% (whichever is lower)
Untaxed element amounts can be taxed at higher effective rates.
The ATO also notes that if super is accessed illegally before a condition of release, the entire amount can be taxable regardless of any tax-free component, and the long-term impact of accessing your superannuation early on your retirement balance can be significant.
Scenario 2: You’re between preservation age and 60
This is where strategy matters.
Lump sum: low rate cap (2025–26)
A key concept is the low rate cap. Your taxable component of a lump sum may be taxed at concessional rates up to the cap.
The low rate cap is a lifetime cap.
Your cap is reduced by taxable components you’ve already received since reaching preservation age.
Tax on the taxed element of a superannuation withdrawal
| Age at time of withdrawal | Tax-free component | Taxable component (taxed element) |
|---|---|---|
| Under preservation age | Tax-free | Taxed at 20% + Medicare levy |
| Preservation age to under 60 | Tax-free |
Up to the low rate cap: 0% (plus Medicare levy may apply) Above the low rate cap: 15% + Medicare levy |
| 60 and over | Tax-free | Tax-free |
Note (2025–26): The low rate cap amount is $260,000 for the 2025–26 financial year. It’s a lifetime limit that applies concessional tax treatment to the taxable component of lump sum payments you receive between your preservation age and age 60.
Income stream: 15% tax offset
For many people in this age bracket, a taxed-element income stream is taxed at your marginal tax rate less a 15% tax offset.
Scenario 3: You’re 60 or over
For many Australians, this is the simplest headline:
If you’re 60 or over, withdrawals from a taxed super fund are often tax free (including many lump sums and income streams).
However, complexity can still arise for:
Untaxed element benefits (certain public sector arrangements)
Defined benefit income cap issues for capped defined benefit income streams
Untaxed funds and public sector funds (where rates can be higher)
If you withdraw from an untaxed super fund (often certain public sector fund arrangements), tax rates can be higher.
Untaxed funds and public sector funds: the “untaxed element” table
Tax on the untaxed element of a superannuation withdrawal
| Age at time of withdrawal | Tax-free component | Taxable component (untaxed element) |
|---|---|---|
| Under preservation age | Tax-free | Taxed at 30% + Medicare levy |
| Preservation age to under 60 | Tax-free | Taxed at 30% + Medicare levy |
| 60 and over | Tax-free |
Up to the untaxed plan cap: 15% + Medicare levy Above the untaxed plan cap: top marginal tax rate + Medicare levy |
Note (2025–26): The untaxed plan cap amount changes over time. If you’re dealing with an untaxed element, it’s worth checking the current cap for the year of payment before you withdraw.
Death benefit payments: who receives it changes everything
When someone dies, their super is generally paid as a super death benefit to dependants or the estate (often via a legal personal representative), and careful end-of-life tax planning can help manage how those benefits and other assets are taxed.
Dependant vs non-dependant (for tax purposes)
Tax outcomes depend on whether the recipient is a dependant for tax purposes.
If the death benefit is paid to a dependant, it is generally tax free as a lump sum.
If paid to a non-dependant, tax may apply to the taxable component.
Tax on death benefit payments to a dependent
| Recipient | Payment type | Tax-free component | Taxable component |
|---|---|---|---|
| Tax dependent (e.g., spouse; child under 18; interdependency) | Lump sum | Tax-free | Tax-free |
| Tax dependent | Income stream | Tax-free | Generally taxed at marginal rates, with a tax offset potentially available (depends on age and component) |
Tax on death benefit payments to a non-dependent
| Recipient | Payment type | Tax-free component | Taxable component |
|---|---|---|---|
| Non-dependent for tax purposes (commonly adult child) | Lump sum | Tax-free |
Taxed element: 15% + Medicare levy Untaxed element: 30% + Medicare levy |
Early access situations people ask about
A few common questions we hear at Bishop Collins:
Severe financial hardship / compassionate grounds: you may pay tax depending on age and components.
Terminal medical condition: withdrawals may be tax free if conditions are met (your brief notes a 24-month window).
Temporary residents leaving Australia: your brief notes these can be taxed at higher rates (often 35% taxed element, or 65% for certain visa holders).
New from 1 July 2026: additional tax for super balances above $3 million
From 1 July 2026, your brief notes a new tax applies to earnings on super balances above $3 million at 15%, with an effective tax of 30% on those earnings.
This is one of the biggest “recent detail” updates to consider if you’re a high net worth individual with large super balances, especially given the heightened ATO focus on compliance and the risk of tax audits triggered by super and other discrepancies.
Practical checklist before you withdraw a lump sum or start an income stream
Before you withdraw a lump sum or commence a retirement phase income stream, it’s worth confirming how this interacts with any foreign income tax obligations in Australia and then working through:
Your preservation age and whether you’ve met a condition of release
Your tax-free vs taxable split (and taxed vs untaxed elements)
Whether you want a lump sum, an income stream, or a mix
Whether the choice affects Age Pension eligibility or interacts with Family Tax Benefit and whether it is taxable income
Whether you’ll need to include amounts in your tax return as assessable income, alongside any cash income that must be declared to the ATO
How Bishop Collins can help
If you want a clear answer on the tax you pay (and how to avoid paying extra tax where legitimately possible), Bishop Collins can help you model the options – lump sum versus income stream, component impacts, any death benefit planning considerations, and how your withdrawals fit with your taxation requirements.
Because super withdrawals sit at the intersection of tax, structure, and retirement planning, getting the sequencing right can matter just as much as the rate, and staying across current accounting and financial news can help you navigate rule changes.
And if you’re making these decisions while also running a business and juggling everything else: You’re Not Alone In Business.
Reference
Australian Taxation Office: Tax on super benefits https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/early-access-to-super/tax-on-super-benefits
General information only. This article doesn’t consider your personal circumstances. Seek advice before acting.
