The portion of a superannuation benefit derived from non-concessional (after-tax) contributions, which is never taxed when paid as a benefit. This includes personal contributions made from after-tax income.
The tax-free component of a super benefit is the portion sourced from after-tax money. It is paid tax-free in every circumstance: any age, any benefit type, any beneficiary.
This certainty makes the tax-free component valuable for estate planning when non-dependant beneficiaries (typically adult children) are likely to receive the balance.
| Source | What it is | |---|---| | Non-concessional contributions | Personal contributions where no tax deduction was claimed | | Government co-contributions | Co-payments from the ATO for low-income earners | | Pre-1 July 1983 crystallised amount | Pre-1983 service balance frozen at 30 June 2007 | | CGT cap contributions | Small business CGT proceeds contributed under the lifetime cap | | Spouse contributions | Contributions made on your behalf by your spouse |
Investment earnings on your super balance flow into the taxable component, not the tax-free component. The only way to increase the tax-free component is to make further non-concessional contributions or trigger one of the other sources above.
This means the ratio of tax-free to taxable shifts over time. Earnings dilute the tax-free proportion as the taxable side grows from compound returns.
All super withdrawals and benefit payments must split proportionally between the two components in the same ratio as your account balance. You cannot direct a withdrawal to come only from the tax-free component. The rule is set out in Income Tax Assessment Act 1997, Section 307-210.
Without the $200,000 tax-free component, the same total balance would have produced an additional $34,000 of tax. Strategic non-concessional contributions late in working life can lift the tax-free component and reduce death benefit tax to non-dependants.
Lisa contributes $110,000 in non-concessional contributions over three years, building her tax-free component. When she dies with a $650,000 balance ($200,000 tax-free, $450,000 taxable), her adult daughter inherits. The $200,000 tax-free component is not taxed, while the $450,000 taxable component is taxed at 17% ($76,500), resulting in a $573,500 net benefit.
Mark has $400,000 in super with $80,000 (20%) tax-free component. He withdraws $100,000 before age 60 for a transition to retirement pension. The withdrawal consists of $20,000 tax-free component (not taxed) and $80,000 taxable component (taxed at his marginal rate less 15% offset).
Sarah receives a $300,000 TPD benefit from super, comprising $60,000 tax-free component and $240,000 taxable component. As she meets the permanent incapacity condition, both components are paid tax-free, but the distinction matters for record-keeping if she later returns to super.
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