Approaching the Untaxed Plan Cap

Funds held in superannuation have different tax components that affect the balance. These components are relevant when accessing funds, such as during retirement, death, or disability. The tax components include tax-free, taxable (taxed), and taxable (untaxed). The tax-free component consists of all after-tax or non-concessional contributions made, while the taxable component is the remainder of the fund. Whether the taxable component is treated as taxed or untaxed depends on whether tax has already been paid by the fund. Untaxed components are typically found in constitutionally protected superannuation funds for public service employees.

Understanding the Untaxed Plan Cap

There is a cap on the amount that can be taxed at a reduced rate in untaxed superannuation funds. This is known as the untaxed plan cap. In the 2025/26 financial year, it was set at $1.865 million. This cap is indexed in line with Average Weekly Ordinary Time Earnings (AWOTE) to the nearest $5,000 (rounded down). Upon reaching retirement age (over 60), members typically pay between 15% and 17% tax on the untaxed component to access it. This tax is unavoidable. If the untaxed balance exceeds $1.865 million, any excess withdrawn will incur tax rates between 45% and 47%.

Common Untaxed Funds in Perth

In Perth, Western Australia, the two most common untaxed funds are GESB’s Gold State and West State. These funds are closed to new members, and only individuals working for the WA state government can contribute to them. Once these funds are closed, a member cannot rejoin. Therefore, it is crucial to seek advice before considering the closure of these accounts.

These funds are constitutionally protected, meaning they are not subject to some of the same rules as standard superannuation funds. Most individuals cannot contribute more than the concessional contribution cap to superannuation each year, which is $30,000 per financial year in 2025/26. However, constitutionally protected funds do not have an annual concessional contribution cap. Instead, they have the untaxed plan cap of $1.865 million that can accumulate from pre-tax funds, including employer SG contributions of 12% of salary, salary sacrifice, and investment earnings.

Tax Implications of Concessional Contributions

Concessional contributions typically incur a 15% tax within superannuation as the contributions are made. Another advantage of constitutionally protected funds is that these contributions are not taxed until one rolls the funds out to a “standard” fund or to themselves personally. This allows the tax payable to remain invested throughout one’s career, attracting investment earnings on this additional 15%.

However, if one believes they will exceed the untaxed plan cap at some point in their career, it may be beneficial to regularly roll funds out of the plan (if eligible). This may seem counterintuitive, as it involves the premature payment of tax, and no future investment earnings can then be earned on this amount. Nevertheless, rolling the funds out can help ensure that future investment growth does not significantly contribute to exceeding the cap. Members likely to exceed the cap should aim to leave as much of the untaxed plan cap available for concessional superannuation contributions rather than for investment growth, which can be earned elsewhere.

A Practical Example

Let us consider Mrs Johnson, who has a salary of $180,000 per annum. Her employer contributes 12% of her salary to West State, and she salary sacrifices $100,000 per annum to the same fund. At 57 years old, she plans to work for another eight years. Her current untaxed balance in West State is $1.2 million. The table below assumes 7% annual investment earnings and no withdrawals over the next 8 years. It shows that the untaxed plan cap is breached in year four.

Instead, if Mrs Johnson withdraws the bulk of her West State account balance each year and rolls it over to a taxed superannuation fund (without closing West State), there is still a small amount of cap space remaining at the end of year eight:

This strategy allows her to continue making large salary sacrifice contributions for four more years of her career. It also helps her avoid incurring 45% or more tax on the excess in West State above the untaxed plan cap. If someone inadvertently breaches the untaxed plan cap, there are strategies that can be employed to manage this situation.

Contact Andep today to book a meeting and discuss your personal circumstances.

Book online