Q: My wife (age 63) and myself (age 65) have a small business. I was told by an organisation that at 65 or over I could put money into super, pay 15% tax on the way in and then draw it out when I wished and pay no tax. In fact I have been told to pay myself $30,000 or less and source the rest of my income through my super fund. My accountant has told me that she thinks I have to set up a super pension. Could you please confirm what is correct?
Before I do provide an answer, I must point out that this site does not give financial advice or tax advice. We are an information site which means any response that I give is a general response for the benefit of all visitors to our site, rather than a response that you can rely on as personal advice.
In short, I will first explain the contribution rules for over-65s, then, when Australians can access super benefits, the rules that apply when a super account is in pension phase, and finally, the tax management strategy that you mention in your question.
Making super contributions
Anyone aged 65 or over, must satisfy a work test before making super contributions. The work test involves working 40 hours in any 30-day period in the financial year in which you plan to contribute. You must be paid for that work.
Note: Anyone under the age of 65 can make super contributions without satisfying a work test.
You can make two types of contributions – concessional contributions and non-concessional contributions.
Concessional (before-tax) contributions are subject to a 15% contributions tax upon entry to the super account (or 30% tax if your adjusted taxable income is greater than $300,000 a year).
In contrast, non-concessional (after-tax) contributions are not subject to a contributions tax upon entry into the super fund, because these contributions are already considered to be sourced from income that has been taxed at some stage. I explain the contribution rules for over-65s in more detail and related articles on the general contribution rules in the following SuperGuide articles:
- 65 and over: Making super contributions
- For over 65s: ten super tips when making super contributions
Note: Owners of small businesses may be eligible for special capital gains tax (CGT) concessions when planning for retirement (click here for the ATO link on this topic), including a special CGT cap when contributing business proceeds to super.
Accessing super benefits
You can access your benefits when you satisfy a condition of release. For most Australians, the condition of release that applies is reaching preservation age AND retiring. Your preservation age can be 55, 56, 57, 58, 59 or 60 years, depending on your date of birth. Your preservation age is 55 years if you were born before July 1960, and at least age 56 years if you were born after June 1960. If you were born after June 1964, your preservation age is 60 years.
Reaching the age of 65 is also a condition of release, which means that when you turn 65, you don’t have to retire to access your super benefits on or after the age of 65.
An individual aged, say 63, would need to satisfy a condition of release, such as, for example, retiring or starting a transition-to-retirement pension (TRIP), to access preserved super benefits.
I explain the conditions of release in the SuperGuide article Accessing super early: 14 legal reasons to cash your super.
Note: If you access your super benefits on or after the age of 60, your super benefits are free of tax (unless you’re a member of certain public sector funds known as ‘untaxed funds’). You can find more information on the tax treatment of super benefits in the following SuperGuide articles:
Alternatively you can visit the ‘Super and Tax’ section of this site.
Running a super pension
You don’t have to be receiving a superannuation pension (also known as a superannuation income stream) to access your super benefits, but earnings on a super account are taxed differently depending on whether your super account is in pension phase or accumulation phase.
In simple terms, accumulation phase is when you haven’t started a pension/income stream. Any earnings on fund assets while in accumulation phase are subject to 15% earnings tax. When a super account is in pension phase, any earnings on fund assets are exempt from tax. Starting a pension means tax-free fund earnings, or more specifically, tax-exempt fund earnings.
Note: Tax-exempt fund earnings are different from tax-free super benefits payable from a super fund. The difference is that fund earnings relate to the super fund, while super benefits relate to the individual receiving the benefits.
If an individual is under the age of 65 and hasn’t retired, but the individual wants to access super benefits, then a popular strategy is to start a transition-to retirement-pension (TRIP). A TRIP enables a working individual who has reached their preservation age to access a maximum of 10% of their super account each year as pension payments. I explain the rules applicable to TRIPs in the SuperGuide article TRIPs: 10 interesting facts about transition-to-retirement pensions .
Tax management strategies
Many Australians use a super fund to save for retirement because the Government provides tax incentives to do so. The deal is that you get tax breaks for locking your money away until you retire. I provide a summary of how super is taxed in the ‘Super & Tax’ section on this website, which also contains the following SuperGuide articles
- Super for beginners, part 17: Four must-knows about super’s tax rules
- Retiring before the age of 60: the tax deal
- Tax-free super for over-60s, except for some
If you’re considering tax management strategies then the best person to talk to is a registered tax agent, typically an accountant. Any discussion in this article on tax matters is for illustrative purposes only.
The general rule is that if an individual is paying income tax of 15% or less on personal income, then saving via a super fund is not a tax-effective option (although the Government has introduced a refund of contributions tax on employer super contributions for those earning less than $37,000). For more information on this superannuation tax refund see SuperGuide article Super tax refund for lower-income earners available until 2016/2017 year.
If you have reached Age Pension age, then you may be eligible for the Seniors and Pensioners Tax Offset (SAPTO) which means you may not pay any tax on your non-super income. SAPTO is not available if your income is significant. I explain SAPTO in my article No tax in retirement because you SAPTO (updated rates).
So, the main message is: if your marginal rate of income tax is 15% or less (the Australian marginal tax rates are 0%, 19%, 32.5%, 37%, 47%), then superannuation may not offer any tax breaks. With every general rule however there are a few exceptions including the following:
- Accessing co-contribution scheme. A co-contribution is a tax-free payment from the Government, paid directly into your super account. If your income is under a certain threshold, and you’re working, and you make a non-concessional (after-tax) contribution, then the Government makes a tax-free payment to your super fund. Receiving a 50% tax-free return on a $1,000 super contribution can be a very tax-effective decision. I explain the co-contribution in the SuperGuide article Cashing in on the co-contribution rules (2015/2016 year).
- Taking benefits from super on or after age 60. Super benefits paid from a super fund on or after 60 are tax-free (except for certain benefits paid from some public sector funds) which means tax-free super income beats paying income tax.
- Starting an income stream/pension. A super account in pension phase is not subject to earnings tax on the account’s earnings, so an individual aged 60, and receiving a superannuation pension, receives tax-free benefit payments, PLUS the super fund pays no tax on its earnings. The super payments are not counted as ‘taxable income’ which means an individual could receive, say, $100,000 a year, from his super fund and still earn nil taxable income. Even when an individual starts a pension before the age of 60, tax offsets and how an individual structures their salary (if any) and pension payments can mean a lower tax bill than if they hadn’t used the super structure.
- Refund of contributions tax for those on lower incomes. Effective since 1 July 2012 and applicable until 30 June 2017, the federal government will contribute up to $500 each year to an individual’s superannuation account, where the individual’s adjusted taxable income is less than $37,000. The exact amount is calculated by working out how much contributions tax is payable on the actual concessional (before-tax) contribution, and then refunding this amount as a payment to the individual’s super account.
Note: Seek tax advice if you’re considering using a super fund as a means of minimising tax.