Which pension funds pay tax

What is the difference between a normal accumulation superannuation account most of us have and a defined benefit super provided to the employees of the Commonwealth government and most people working in the public sector?

Well, the accumulation superannuation account is the account that accepts different types of super contributions. Then the balance is invested according to members’ choice and the outcome depends on market returns and earning made over time.

Defined benefit funds are different as their final benefit will depend on other factors such as years of service or the final average salary or both. Therefore, the final outcome is pre-determined and calculated based on a certain formula, rather then investment outcomes.

You might think that this is a fantastic superannuation outcome, that the government invented for themselves. And in most cases this is true, apart from one tiny detail – tax.

I have been talking about superannuation a great deal on this channel, and I have explained different types of contributions you can make to super. Therefore, you should know by now that there are two types of contributions:

Concessional – otherwise known as pre-tax contributions, where someone claimed a tax deduction and

Non-concessional – otherwise known as personal after-tax contributions or “tax-free” contributions.

Well, a defined benefit super and pension account will very often have what we call an un-taxed element, and this is where the issue of the tax that Aboud is mentioning in his email.

Why is this an issue?

In the world of employment outside of the government or public sector, when an employer contributes to super, the fund automatically pays the concessional contribution tax of 15% to the ATO.

However, this has not been happening in defined benefit super funds. When working for the government and in any public sector, your employer (the government) would make those contributions, but somehow forgot to pay the tax.

Well, let’s be honest the government hasn’t really forgotten, but most of those contributions were done on the piece of paper, as the accounting calculations only, so there was no real money to pay the tax. That money has never been invested; it was just an accounting calculation to know how much the government owes you when you retire.

It was much easier to calculate that final benefit based on the years of your service or a multiple of your final salary.

Therefore, you have a situation that contributions were made (at least recorded), no contribution tax was had been paid over the years and once you got to your retirement your defined benefit super or pension has included an untaxed element.


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