I’m 58 and I have $220,000 in super. Will my super be taxed?

Q: I’ve just turned 58, and I’m thinking of retiring before I turn 60. I would like to know whether I would have to pay tax on my superannuation. I know that after I turn 60, it’s tax-free, so my inquiry is regarding the period until I turn 60. I have been employed by several private firms since I first belonged to a super fund in 1989. I am still with the same super fund. My super money consists of compulsory employer contributions, and personal contributions from me (consisting of money that I’ve already been taxed on, and some money that was the proceeds of a house sale… the proceeds were not taxable as the house was my primary residence). My total super is $230,000. I would like to take about $50,000 to $80,000 or so as a lump sum, and the rest as a pension. So my question is: Between now and when I turn 60, will I be subject to any tax on any super money I receive, namely, tax on the lump sum, or tax on pension income, or tax on pensions earnings from the super in my super account?

I am not permitted to comment specifically on your financial circumstances, but I can certainly explain how the tax rules work, generally, when taking super benefits before the age of 60. I also provide 3 examples later in my response. I suggest you chat to an accountant/financial adviser for specific tax advice, or retirement planning advice.

Super benefits can be made up of two components – tax-free and taxable. The tax-free component is always tax-free and the taxable component is taxed depending on the size of the benefit and the age of the fund member.

Any non-concessional (after-tax) contributions form part of the tax-free component, although fund earnings on those contributions form part of the taxable component.

Tax treatment of lump sums for under-60s

If an individual retires, and receives a superannuation lump sum from a taxed source on or after the age of 55 (but before the age of 60), he or she can take advantage of the low-rate cap, an indexed lifetime limit that applies to an individual’s taxable component. An individual can receive up to $180,000 (for the 2013/2014 year) of their taxable component tax-free, provided the component is a taxed element (all super benefits are treated as a taxed element, except certain benefits from public sector funds).

The low-rate cap is in addition to any tax-free component. If a super benefit includes a ‘tax-free component’ then no tax is payable on this component of a benefit even when an individual is under the age of 60.

Note: If an individual has withdrawn super benefits in the past, he or she may have used up some, or all, of their low-rate cap which means he or she may have to pay tax on the taxable component when he or she takes additional lump sums.

When an individual is aged 55 or over but under 60, and a lump sum exceeds the lifetime low-rate cap, then tax is payable on the taxable component at the rate of 16.5%.

Tax treatment of pension payments for under-60s

Individuals who choose to take an income stream (pension) in retirement receive a double tax bonus. First, any fund earnings on assets used to finance a superannuation pension are tax-free. Second, the taxable component of pension payments is taxed concessionally via a 15% pension offset (tax rebate) on pension income, provided the individual has reached their preservation age (currently age 55). The tax-free component of a pension payment is always tax-free.

I explain how the tax-free and taxable components are calculated in the article SMSFs: What is the proportioning rule?

Examples

For illustrative purposes, and assuming no super lump sums have been withdrawn in the past, let’s say an individual is aged 58 and has $220,000 in a super account. The super fund confirms that the tax-free component is $22,000, and the taxable component is $198,000. What are the tax implications if the individual:

  • Withdraws 100% of the $220,000 super benefit as a lump sum.
  • Withdraws $80,000 as a lump sum, and starts a super pension with the remaining $140,000.
  • Uses 100% of the $220,000 to start a super pension.

Example 1: Withdraws 100% of the $220,000 super benefit as a lump sum

Withdrawing super benefits before the age of 60 can mean potential super benefits tax. In this instance, the $22,000 tax-free component of the lump sum is not subject to tax. The taxable component is usually subject to 15% (plus Medicare Levy), except an individual can utilise a low-rate cap, which means the first $180,000 of the taxable component of the lump sum is not subject to tax.

Tax outcome: The tax outcome is that tax is payable on $18,000 of the $220,000 lump sum when withdrawn before the age of 60, but on or after the age of 55. The tax payable is $2,700 (plus Medicare Levy).

Example 2: Withdraws $80,000 as a lump sum, and starts a pension with remaining $140,000

Withdrawing super benefits before the age of 60 can mean potential super benefits tax. The super benefit is made of 10% tax-free component ($22,000) and 90% taxable component ($198,000). Accordingly, the $80,000 lump is made up $8,000 tax-free component and $72,000 taxable component. The $8,000 tax-free component is tax-free. The taxable component is usually subject to 15% (plus Medicare Levy), except an individual can utilise a low-rate cap, which means the first $180,000 of the taxable component of the lump sum is not subject to tax.

Tax outcome: In this instance, the $72,000 taxable component of the lump sum is not subject to tax. Any pension income drawn from the $140,000 pension account, is made up of 10% tax-free component and 90% taxable component. The pension income sourced from the taxable component forms part of an individual’s assessable income, but the pension is also eligible for a 15% pension offset against the taxable component of the pension. At these levels, no income tax is likely to be payable on the pension income, although it still is included in your tax return.

Example 3: Uses 100% of the $220,000 to start a super pension

Withdrawing super benefits before the age of 60 can mean potential super benefits tax. Any pension income drawn from the $220,000 pension account, is made up of 10% tax-free component and 90% taxable component.

Tax outcome: The tax-free component of the pension income is tax-free. The pension income sourced from the taxable component forms part of an individual’s assessable income, but the pension is also eligible for a 15% pension offset against the taxable component of the pension. At these levels (depending on how much is withdrawn each year), no income tax is likely to be payable, although it still is included in your tax return.

Tax treatment of pension earnings

Earnings on superannuation assets in pension phase are exempt from tax, regardless of the age of the pension fund member. Note that the federal government has announced a proposed tax of 15% on pension earnings above $100,000 a year, starting from 1 July 2014. Legislation is not yet in place.

© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.

IMPORTANT: SuperGuide does not provide financial advice. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.

Comments

  1. I would like to retire now (aged 58). Am I able to withdraw only my non-taxable superannuation amount and wait until I am 6 before I convert the rest of my super into an income stream?

  2. Bernard Oh says:

    Hi Trish, my wife plans to retire next year at age 57 and plan to put her $180,000 Super amount into a Pension fund. We plan to sell one of our investment properties when she reaches the age of 60. Is she able to contirbute an additional $200,000 into her pension fund at that age.

    Appreciate your advise,
    Bernard Oh

  3. I have a SMSF and I have terrm deposit of $100,000 { outside my SMSF } which matures next month. If I place in my SMSF’d can I redraw the capital at a later date if I wish to ? I do nit envisage doing so at this stage.

  4. stephanie says:

    Hello, I have a question please ..

    .Is the low-cap rate figure assessed every year (currently at 2010/2011 @ $160K), or NOT.

    thanks

    • Hi Stephanie
      Thanks for your email. The new figure for the 2011/2012 was just released this week – the low-rate cap amount will be $165,000 for 2011/2012 year (and is indexed each year). You can confirm this figure on the ATO website. We will be publishing the 2011/2012 thresholds when we email our March 2011 newsletter.
      Regards
      Trish

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