- What about the news reports that tax-free super should be removed?
- How does tax-free super for over-60s work?
- Turning 60, and turning 65, are significant
- Consider taking a super pension (superannuation income stream)
- Summary table: Possible taxes on your super WHEN 60 YEARS OF AGE OR OVER
If you withdraw your super benefits after you turn 60 years of age, you can expect to pay NO tax on those super benefit payment, unless you are a member of certain public sector super funds (see summary table at the end of this article).
Due to the large number of emails I receive on this topic, I’ll repeat the standard rule for most Australians: if you withdraw super benefit payments on or after the age of 60, your super benefit payment will be free of payments tax and income tax. The main exception to this standard rule is where you are a member of an untaxed scheme (some public sector funds), and some tax may still apply. I summarise the tax treatment of super benefits received by over-60s later in the article, and provide a summary table at the end of this article.
Note: From 1 July 2017 and subject to legislation, there will be a limit on the amount of super you can transfer to pension phase within the superannuation system (for more information on this measure see SuperGuide article Liberals to impose $1.6 million cap on pension start balances), but this new measure does not affect the tax treatment of super benefit payments.
Important: Although superannuation benefits are tax-free when received on or after the age of 60, you still must satisfy a condition of release, such as retiring from the workforce or starting a transition-to-retirement pension, to access your super benefits before the age of 65.
If you are seeking information on the tax treatment of super benefits taken before the age of 60, then check out the SuperGuide article Retiring before the age of 60: the tax deal.
What about the news reports that tax-free super should be removed?
Note: If you just want an explanation on the tax treatment of super for over-60s, then skip this section, and scroll down to the next section and table.
The previous Liberal government, or more specifically, the former Prime Minister Tony Abbott, publicly stated that no changes to the superannuation tax system will happen — ever! In February 2015, the rumours began again that tax-free super for over-60s may be changed. The Liberals however drew a line in the political sand and declared that tax-free super for over-60s will remain indefinitely.
That was so yesterday. Now that we have a new PM (Malcolm Turnbull) and new treasurer (Scott Morrison), and newly re-elected Coalition government, anything is possible based on the recent super changes announced in the 2016 Federal Budget (for a summary of those changes, see SuperGuide article 2016 Federal Budget update: Superannuation changes likely to become law).
The general message however that you can take from the Coalition government’s position on superannuation is that tax-free super benefit payments for over-60s will continue in the foreseeable future, although the Coalition plans to cap the amount of super that can enjoy tax-exempt earnings in pension phase.
From the other side of the political fence, in late 2012, the former ALP government did fuel a rumour (started by themselves) that tax-free treatment of super benefits received by over-60s would be changed. The rumours fizzled out when the former ALP government realised that it would be political suicide to remove the tax-free status of retirement benefit payments, and for not much financial reward.
Good luck to the government that decides to win any future election by removing tax-free super for over-60s, or misleads the electorate into believing the government won’t change this rule, and then does change it after an election! Reminding the reader again that the Coalition will be introducing a cap on the amount of super that can be transferred to pension phase (for information on this cap, see SuperGuide article Liberals to impose $1.6 million cap on pension start balances).
Background: The reason the former Liberal federal government introduced tax-free super in 2007 is that the then-treasurer Peter Costello realised, at the time, very few retirees were paying income tax, and the cost to the federal budget was not as big as the political goodwill benefits of delivering tax-free super to over-60s. Fast-forward to 2013, and the relatively new Liberal government, elected in September 2013 and restructured in September 2015, had promised ‘no changes to super’ during the first term of government, and more recently promised that there will be no changes to super taxes, ever. In May 2016, the new treasurer and new PM have backpeddled from this strong promise, and announced radical changes to the super system, which have been confirmed with the Coalition being re-elected in the 2016 Federal Election.
Keep in mind that the new Liberal treasurer, Scott Morrison, while he was Minister for Social Services, was responsible for the tough changes to the Age Pension rules taking effect from January 2017 (and changes affecting defined benefit pension members that took effect from January 2016). Arguably these tough Age Pension changes were simply changes to the super rules in reverse, since it dramatically affected the treatment of super benefits for part Age Pensioners (for more information on these Age Pension changes, see SuperGuide articles Age Pension: 300,000-plus Australians lose entitlements from January 2017 and Super alert! Age Pension income test change hits funded defined benefit pensions).
In the foreseeable future, the super tax rules for over-60s remain in place. I explain how tax-free super benefit payments for over-60s operate in the next section, and summarise the tax treatment in the table at the end of the article.
For the tax treatment of super benefits received before the age of 60 see SuperGuide article Retiring before the age of 60: the tax deal.
How does tax-free super for over-60s work?
If you’re aged 60 or over, and you satisfy a condition of release (such as retiring, or starting a transition-to-retirement pension), you can receive your superannuation benefits tax-free — as a lump sum, or as a superannuation pension. A pension is also known as an income stream (regular payments over a period of time). You can enjoy a tax-free income in retirement assuming you have sufficient super savings to deliver you that regular income in retirement.
Note: Tax-free super has always been a feature of Australia’s retirement system but, before July 2007, you usually had to hire advisers and get involved in creative financial gymnastics to make it happen — not unlike what you still have to do to secure tax-free income when you retire before the age of 60. And before July 2007, how much super you could receive at concessional rates was limited. From 1 July 2017, the Coalition government is re-introducing an effective cap on the amount of tax-exempt earnings a fund member can generate on his or her super account (by capping pension start balances to $1.6 million), but this is a separate measure to tax-free super benefit payments.
Since 2007, what is particularly attractive for retirees is that, you can earn non-super income in addition to your superannuation income and still pay little or no tax because your superannuation benefit isn’t counted as income for tax purposes. What this means is that the benefit payments from your superannuation fund are not included in your tax return. For example, you can, say, receive $80,000 income from your super fund, and $18,200 (for the 2015/2016 year) from part-time work and pay no tax, and potentially earn up to $20,542 of non-super income tax-free, when you take into account the Low Income Tax Offset. You can potentially create an annual income of $100,000 or more, and not pay a cent of income tax, although most retirees don’t receive incomes at this level.
If you’re aged 65 or over, you can potentially earn even more non-super income and pay no income tax (due to the application of the Senior Australians and Pensioners Tax Offset). For more information about SAPTO see SuperGuide article No tax in retirement because you SAPTO (updated rates).
Public servants aged 60 or over may still pay tax on super: If you’re aged 60 or over and retired, your superannuation benefit paymens from a taxed source are tax-free — most Australians are members of a taxed super fund. If your super benefits are paid from an untaxed source (some public sector funds), however, then your benefits may still subject to income tax after you turn 60, but less tax than if you were receiving your super benefits under the age of 60.
For specific tax rates for super benefits paid from an untaxed source on or after the age of 60, see summary table at the end of this article.
Turning 60, and turning 65, are significant
In the past, the retirement age of 65 used to be the main focus in retirement planning because that was the official age of retirement for many companies. Further, it was only a few years ago that you weren’t permitted to work beyond the age of 65 if you were an employee. Now, the focus (at least for tax purposes) is the age of 60.
Turning 65 remains important in super terms for those Australians who want to continue working but access all of their super benefits, either as a lump sum or as a super pension. If you turn 65 years of age, this milestone is considered a condition of release and you can access your super benefits without retiring or satisfying another condition of release.
Note: More importantly, the age of 65 was the Age Pension age for Australian men and women, although Age Pension age gradually increases to 67 years from 2023, and increases to 65.5 years from July 2017 (see SuperGuide article Age Pension age increasing to 67 years (not 70 years)).
The Age Pension is still a very important part of retirement planning for most Australians because around 80 per cent of retired Australians of Age Pension age currently receive a full or part-Age Pension. Note that from 1 January 2017, the Age Pension assets test will become much harsher for part-Age Pensioners (for more information see SuperGuide article Age Pension: 300,000-plus Australians lose entitlements from January 2017), and from January 2016, became harsher for retirees with defined benefit super pensions (see SuperGuide article Super alert! Age Pension income test change hits funded defined benefit pensions).
Consider taking a super pension (superannuation income stream)
Besides enjoying tax-free income in retirement, a compelling argument for starting a superannuation pension is that the earnings on assets financing your pension are exempt from tax. You receive tax-free income, and your tax-free income is sourced from assets that are invested in a tax-exempt environment.
In comparison, if you invest your savings outside the super environment, the earnings on your savings are potentially subject to income tax.
Note: If you choose, you can leave your super account in accumulation phase indefinitely. You’re not forced to take a lump sum or start a pension. Accumulation phase means that you haven’t started a pension with your superannuation account. By choosing such a strategy, however, your super account’s fund earnings on assets in accumulation phase continue to be subject to up to 15% earnings tax.
Noting of course that the government is introducing a $1.6 million cap on pension starting balances, as at 1 July 2017.
Summary table: Possible taxes on your super WHEN 60 YEARS OF AGE OR OVER
The summary table below contains the following information on super taxes for over-60s:
- Contributions taxes
- Earnings taxes (accumulation phase)
- Benefit payment taxes applicable when taking lump sums or super pensions from a TAXED scheme (most super funds are taxed schemes)
- Benefit payment taxes applicable when taking lump sums or super pensions from an UNTAXED scheme (certain older public sector schemes). Different tax rates apply if you’re a member of an untaxed scheme
Possible taxes on your super WHEN 60 YEARS OF AGE OR OVER
|Tax||Tax Rates||What Part of Your Super is Taxed?|
|CONTRIBUTIONS TAXES (does not apply to ‘untaxed’ schemes)|
|‘Contributions’ Tax*||15%||Tax applies to any concessional (before-tax) contributions|
|Division 293 Tax||15%||Additional tax applies to any concessional contributions paid by those who earn more than $300,000 a year (income for surcharge purposes), taking total tax on concessional contributions to 30%. From 1 July 2017, the income threshold drops to $250,000|
|EARNINGS TAXES** on fund income (taxed source)|
|Investment Income Tax||15%||Tax on investment earnings. No earnings tax in pension phase.|
|Capital Gains Tax (CGT)||15% (effective rate of 10% after CGT discount)||Tax on capital gains in your fund. Effective tax rate of 10% for gains on assets held for more than 12 months. No tax payable on capital gains in pension phase.|
|Non-Arm’s Length Income||47%||Income from a source that is not on a commercial arm’s length basis. Tax is also payable on this income in pension phase.|
|BENEFIT PAYMENT TAXES for Over-60s|
|SUPER LUMP SUMS (60 year or over)|
|Tax||Tax Rates||What Part of Your Super is Taxed?|
|Taxed scheme (MOST Australians are members of such schemes)|
|Lump Sums (taxed scheme)||0%||No tax payable on ‘tax-free component’^ of lump sum.|
|Lump Sums (taxed scheme)||0%||No tax payable on ‘taxable component’^ of lump sum.|
|Untaxed scheme (older public sector schemes)|
|Lump Sums (untaxed scheme)||0%||No tax payable on ‘tax-free component’^ of lump sum from UNTAXED source^^.|
|Lump Sums (untaxed scheme)||15% (+ Medicare levy)||Tax payable on ‘taxable component’ of benefits from UNTAXED source^^ up to the UNTAXED plan cap amount of $1.415 million (for 2016/2017 year) and $1.395 million (for 2015/2016 year).|
|Lump Sums (untaxed scheme)||47% (+ Medicare Levy)||Tax payable on ‘taxable component’ of benefits from UNTAXED source^^ above the UNTAXED plan cap amount of $1.415 million (for 2016/2017 year) and $1.395 million (for 2015/2016 year.|
|SUPER PENSIONS (60 years and over)|
|Taxed scheme (MOST Australians are members of such schemes)|
|Pensions (taxed scheme)||0%||‘Tax-free component’^ of benefit payment is not subject to tax.|
|Pensions (taxed scheme)||0%||No tax on pension income payments sourced from ‘taxable component’^.|
|Untaxed scheme (older public sector schemes)|
|Pensions (untaxed scheme)||0%||‘Tax-free component’ of super pension from UNTAXED source^^ is not subject to tax|
|Pensions (untaxed scheme)||MTR (Marginal Income Tax Rate) + Medicare Levy with 10% pension offset||Pension income sourced from ‘taxable component’ of benefit from UNTAXED source^^ counted as part of taxable income so subject to MTR, but received 10% pension offset against taxable component. From 1 July 2017, the government plans to impose a limit on the amount of pension benefit payments that receive the 10% tax offset.|
*Contributions are included in a super fund’s assessable income, which is subject to earnings tax of 15 per cent. In relation to contributions, this tax is commonly known as ‘contributions tax’. An additional 15% tax on contributions, known as Division 293 tax, is payable on super contributions of those fund members with an income (for surcharge purposes) of more than $300,000.
**No tax payable on earnings from pension assets, that is, assets financing a pension/income stream.
^ Superannuation benefits can be made up of two components: taxable component and tax-free component. Tax-free component is always tax-free and taxable component is taxed depending on size of benefit and age of fund member. Taxable component is tax-free when received aged 60 years or over, except if the taxable component is from an untaxed source (certain public sector funds).
^^An untaxed source is a super fund that hasn’t paid tax on employer super contributions and super fund earnings. Benefits from an untaxed source are benefits paid from some public sector super funds
Important: The summary table above is the copyright of Trish Power and SuperGuide holds the exclusive licence to the use of this table (unless otherwise negotiated for specific use by selected organisations). In line with our approach with all SuperGuide articles, any unauthorised copying or use will be vigorously pursued through legal channels.