Q: I’ve just turned 59, 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 till 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 $180,000. 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, be it the lump sum or pension or 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 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 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 $165,000 (for the 2011/2012 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Note: If an individual has withdrawn super benefits in the past, he or she may have used up some, or all, of their low-rate cap which means he or she may have to pay tax on the taxable component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. The tax-free component of a pension payment is always tax-free.