Opportunities with untaxed super funds

06 February 2017

Woman dropping coins into a glass jar

Jonathan Armitage

Jonathan Armitage is the Chief Investment Officer at MLC. Jonathan assumes overall responsibility for the investment outcomes of the MLC portfolios.

Although becoming increasingly less common, there are still a number of untaxed or constitutionally protected funds (CPFs) in Australia that provide unique financial planning opportunities to planners.

This article is for educational purposes only and is no longer available for CPD hours.


CPFs are untaxed super funds that do not pay tax on contributions or earnings they receive. They are operated by some state governments in Australia for their employees and are also often created for members of the judiciary. CPFs can be both accumulation style and defined benefit schemes.

Some well known CPFs are:

  • GESB West State Super and Gold State Super (WA State Government);
  • Super SA (SA State Government); and
  • Defence Force Retirement and Death Benefits Scheme.

Under the Australian constitution, state government assets cannot be taxed by the Commonwealth, so different arrangements apply to concessional super contributions made to CPFs.

Essentially, no tax is paid on contributions or earnings until the member leaves the fund. Instead, members are taxed at the time they access their benefit in accordance with Australian Taxation Office rules for untaxed funds. This could be triggered by withdrawing the funds upon meeting a condition of release or rolling over to a taxed super fund or income stream.

The unique characteristics of CPFs open up a number of financial planning strategies and considerations when advising clients who are members of such schemes.

Deferral of tax on earnings and contributions

The deferral of tax on benefits within a CPF may have the benefit of enhancing the growth of the client’s retirement egg.

For example, Gaby, age 58, receives $35,000 of pre-tax contributions to a taxed super fund in the 2015-16 financial year. The net amount of $29,750 earns gross 6 per cent per annum or 5.22 per cent after tax and fees. At the end of five years, the balance has grown to $38,370.

Kellie, age 58, also receives $35,000 of pre-tax super contributions in the 2015-16 financial year. However, her super fund is a CPF. Assuming the same pre-tax rate of return of 6 per cent, at the end of five years, Kellie’s super balance has grown to $46,838. At this time, she rolls the benefits over to a taxed super fund. Tax of 15 per cent on the balance or $7,026 is deducted, reducing the net benefit to $39,812.

Over a five year period, Kellie has additional retirement savings of $1,442 compared to Gaby. This is a further 4.1 per cent return on the original contribution of $35,000 as a result of the deferral of tax.

Concessional contributions

Pre-tax or concessional contributions made to a CPF do not count towards the client’s annual concessional contribution cap, which is currently $30,000 (or $35,000 for those age 49 or over at 30 June).

Therefore, when dealing with clients on the higher marginal tax rates with surplus income, there is an opportunity to aggressively salary sacrifice to simultaneously build their super whilst managing their personal tax.

An ‘untaxed plan cap’ applies to a member’s untaxed super benefits. This is a lifetime limit, which is currently $1.415 million (indexed annually) and applicable to each super fund. This is the amount that can be paid as a lump sum or rolled to a taxed super fund and still enjoy concessional tax treatment.

If a client exceeds their cap of $1.415 million within the fund, tax of 49 per cent on the excess will be deducted before the benefits are rolled over or withdrawn.


Betty is 47 and earns a salary of $230,000 per annum. She has a large surplus cash-flow and is keen to utilise her income more tax-effectively.

She is a member of an accumulation style CPF and her employer makes Super Guarantee contributions of 9.5 per cent ($21,850 per annum) on her behalf.

She makes salary sacrifice contributions of $60,000 in the 2016-17 financial year, bringing her marginal tax rate from 49 per cent to 39 per cent. This reduces her personal tax by an estimated $28,400. Her remaining net annual ‘take home pay’ of around $115,000 is sufficient to cover her expenditure requirements.

If Betty was in a taxed super scheme, she would only be able to make salary sacrifice contributions of $8,150 before reaching her annual $30,000 cap. This would provide an estimated tax saving of $3,993.

Both Betty’s projected tax savings and accumulation of retirement savings are significantly lower within the constraints of the taxed super fund.

Non-concessional contributions

Any non-concessional or after-tax contributions made to a CPF are subject to the same non-concessional contribution cap as contributions to a taxed super fund. This is currently $180,000 per annum or up to $540,000 over a three year period for persons under age 65.

Increasing the tax-free amount

The service period prior to 1 July 1983 forms part of the tax-free component of a client’s super benefit. This portion is commonly referred to as the pre-1 July 1983 amount.

For taxed super funds, the pre-1 July 1983 amount was calculated as at 30 June 2007 and was included as part of the tax-free component on that date. This is referred to as crystallisation, as the amount became fixed and formed part of the tax-free component.

For untaxed super funds, the crystallisation of the pre-1 July 1983 amount for the untaxed element in the fund is only calculated when a lump-sum benefit is withdrawn or rolled over into a taxed super fund.

If a client has pre-1983 service, they may be able to increase their tax-free component by making a non-concessional contribution to their CPF prior to taking their benefit. Naturally, the client would need to have savings available outside super to facilitate the contribution.

If a client has benefits in another super fund with an earlier start date than the CPF, consolidating these monies first would bring across the increased service period, further increasing the tax-free amount on crystallisation.

Example 1

Maddy has $500,000 in a CPF, which includes $100,000 of non-concessional contributions. Her Eligible Start Date (ESD) is 1 July 1973 and she rolls her benefit to a taxed fund at 1 July 2016. (Total pre-1983 days 3,651 from total of 15,706.)

The total tax payable on rollover would be calculated as follows:

  • Total pre-83 service = 3,651 / 15,706 = 23.2 per cent.
  • Therefore, the tax-free component is 23.2 per cent * $500,000 = $116,000 plus $100,000 (non-concessional) = $216,000.
  • Tax on the remaining untaxed element of $284,000 at 15 per cent = $42,600

Now, let’s assume she has available cash to make a non-concessional contribution of $300,000 to her CPF prior to crystallisation.

The tax payable on rollover would be calculated as follows:

  • Total pre-83 service = 3,651 / 15,706 = 23.2 per cent.
  • Therefore, the tax-free component is 23.2 per cent * $800,000 = $185,600 plus $400,000 (non-concessional) = $585,600.
  • Tax on the remaining untaxed element of $214,400 at 15% = $32,160.

The tax payable on rollover has reduced by $10,440 as a result of Maddy’s non-concessional contribution.

Example 2

Alex does not seek financial advice

Alex, age 62, is retiring. He has super in two CPFs: an accumulation and defined benefit account.

The accumulation account has a balance of $400,000, an Eligible Start Date of 1 July 1988 and comprises 80 per cent untaxed monies and 20 per cent tax-free (from non-concessionals).

The defined benefit has a balance of $600,000, an Eligible Start Date of 1 July 1970 and comprises 50 per cent untaxed and 50 per cent tax-free monies (from non-concessionals).

He wants to use his entire super balance to commence an account based pension. He has $250,000 in personal cash.

At 1 July 2016, he rolls his accumulation CPF into a taxed super fund. Fifteen per cent rollover tax ($48,000) is deducted, reducing the benefit to $352,000.

He then consolidates his defined benefit fund into the same taxed fund. The pre-83 component is crystallised at this time.

  • Pre 83 Service days (1/7/1970 – 30/6/83) = 4,747.
  • Post 83 Service days (1/7/1983 – 1/7/2016) = 12,054.
  • Total pre-83 service = 4,747 / 16,801 = 28.3 per cent.

Therefore, his tax-free component is 28.3 per cent of $600,000, which equals $169,800. Adding this to the $300,000 from non-concessionals brings his tax-free component to $469,800.

  • Tax on the remaining untaxed element of $130,200 at 15 per cent = $19,530.
  • Total tax on rollover = $48,000 (accumulation) plus $19,530 (defined benefit) = $67,530.
  • Net benefit remaining = $932,470.

But if Alex sought financial advice

Alex is advised to make a non-concessional contribution of $250,000 from his available savings to his accumulation account and then consolidate these benefits with his defined benefit. There is no crystallisation, as the funds have moved from one untaxed fund to another.

At 1 July 2016, he rolls over his total benefit of $1,250,000 into a taxed super fund. The pre-83 component is crystallised at this time.

  • Total pre-83 service = 4,747 / 16,081 = 28.3 per cent.
  • Therefore, the tax-free component is 28.3 per cent of $1,250,000 = $353,750 plus $630,000 (from non-concessionals) = $983,750.
  • Tax on untaxed element of $266,250 at 15 per cent = $39,938.
  • Net benefit remaining = $1,210,063 (or $960,063 if $250,000 is withdrawn).

Alex’s tax saving from making a non-concessional contribution and consolidating his CPFs prior to crystallisation is $67,530 – $39,938 = $27,592.

Minimising tax on withdrawal

Most clients in taxed super funds are able to withdraw their super benefits tax-free after age 60. However, those in CPFs will need to pay the ‘deferred’ tax on their untaxed monies at this time.

Provided the client has not exceeded their untaxed plan cap of $1.415 million (2016-17), tax will be levied on untaxed super benefits at:

  • A maximum of 15 per cent plus Medicare of 2 per cent for those age 60 or more; and
  • A maximum of 15 per cent plus Medicare of 2 per cent for persons between preservation age to 59 on the first $195,000, then 30 per cent plus Medicare up to the untaxed plan cap.

Whilst this tax cannot be avoided, a useful strategy to reduce the tax deducted is to firstly rollover their benefits to a taxed fund before withdrawing the monies. Whilst 15 per cent tax will be levied on rollover, this two step process eliminates Medicare being paid on the withdrawal.


Cassian is age 60 and has $400,000 in a CPF (all untaxed), which he wants to withdraw and pay off his home loan now he has retired.

If he makes a lump sum withdrawal from the CPF, then tax of 17 per cent or $68,000 will be deducted, leaving a net benefit of $332,000.

Alternatively, he could rollover his benefits to a taxed super fund first and pay 15 per cent rollover tax ($60,000).The remaining funds of $340,000 could then be withdrawn tax-free.

Therefore, Cassian benefits from a tax saving of 2 per cent or $8,000.

Leaving the CPF open

With the state governments introducing new taxed accumulation schemes which are more aligned with current super legislation, many of the CPFs are closed to new members.

Therefore, clients leaving their state government employer before retirement may wish to leave a minimum balance in their CPF. This provides the flexibility to:

  • Return to the fund should they later become employed again by an eligible employer;
  • Potentially make a large non-concessional contribution prior to retirement and crystallising their benefits; and
  • Potentially make a large deductible contribution (if eligible) to offset a capital gain arising, for example, from sale of an investment property or share portfolio.

The drawbacks of CPFs

A CPF may not offer as much flexibility as taxed funds in the market.

Persons who are members of a CPF may not have the availability of choice of fund whilst with their employer, in respect of the contributions their employer makes on their behalf.

Some CPFs do not allow the member to add a binding death benefit nomination to the account. Instead, on death, super benefits will pass in accordance with the rules outlined in prescribed legislation (usually to a surviving spouse or the legal personal representative). This may not meet a member’s objective regarding distribution of assets or provide certainty in estate planning.

Investment choice within CPFs may also be limited compared to larger retail and industry funds.

Division 293 tax

If a client is a ‘high income earner’ (i.e. with income above $300,000 per annum), they will be subject to the Division 293 tax on non-excess concessional or ‘low rate’ contributions regardless of whether these contributions are made to a taxed or untaxed super fund. This will bring the total tax on these contributions to 30 per cent, which is still preferable to a top marginal rate of 49 per cent (including Medicare and Budget levy) for personal income above $180,000 per annum.

Please note that different rules may apply to individuals classified as ‘State Higher Level Office Holders’, such as Commonwealth judges, whose employers make contributions to CPFs. They are generally exempt from Division 293 tax unless the contributions are part of a salary sacrifice arrangement.

Tips and traps

  • Increasing the tax-free component by making additional non-concessional contributions may reduce any potential anti-detriment payment in the event of the client’s death that could be paid with a benefit to a spouse or child.
  • Any benefits rolled over to another super fund or taken as cash must be taken proportionately between the tax-free and taxable components that make up the total entitlement. A client cannot elect to only withdraw the tax-free benefits.
  • Some CPFs have restrictions about contributions regarding whose contributions can be accepted and the types permissible. It is important to confirm this with the relevant fund before providing advice.

Please note that the 2016 Federal Budget proposed a number of changes to superannuation, including a new lifetime cap of non-concessional contributions of $500,000 and potentially extending a reduced concessional contribution cap of $25,000 per annum to members of untaxed funds from 1 July 2017. Should these proposals be legislated, they may have implications when providing advice for clients holding CPFs.

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