If you withdraw your super benefits after you turn 60 years of age, you can expect to pay no tax on those super benefits, unless you are a member of certain public sector super funds (see summary table at the end of this article).
Due to the number of emails I have received about this topic, I’ll repeat the standard rule for most Australians: if you withdraw super benefits on or after the age of 60, your super benefit payment will be free of 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 over-60s in the table at the end of this article.
What about the news reports that tax-free super was going to be removed?
The news reports were incorrect, but those reports were based on deliberately leaked information from government sources.
In late 2012, the federal government dropped a potential T-bomb (that is, a tax bomb) and fuelled the rumours that tax-free super benefits were to be removed for over-60s. The rumours fizzled out when the government ealized it would be political suicide to remove the tax-free status of retirement benefits, and for not much financial reward.
The reason the former Liberal federal government introduced tax-free super is that they realised 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.
Incredibly, the current batch of kamikaze politicians wanted to have another go at testing the resistance of the electorate by leaking the possibility of removing tax-free super for over-60s with superannuation account balances of more than $1 million. I am not sure whether this idea came from the superannuation industry, or from Treasury or from the brain of former Treasurer Mr Wayne Swan (or even Mr Bill Shorten) but the obvious lack of understanding of how the super rules work, in particular the superannuation tax rules, highlights we are dealing with politicians (on all sides of politics) more interested in political ideology then the long-term financial interests of the electorate.
Is there going to be a $1 million cap on tax-free super?
No, there is not going to be a $1 million cap on tax-free super, based on announcements by both sides of parliament.
The $1 million cap for tax-free super triggered a frenzy of newspaper articles and conspiracy theories. In nearly all cases, the government (obviously) and the commentators failed to understand that it is not the account balances that will matter if tax-free super for over-60s was ever removed, but the components of the super benefits. If an individual has a super benefit that is 100% tax-free component (typically made up of non-concessional contributions), then no tax is payable on super benefits paid from that super account, even if that account balance is more than $1 million.
Another oversight by the financially challenged members of the government, is that in many cases, one super account is supporting two people (husband and wife), but some political adviser (or heaven forbid, a member of the superannuation industry) has advised the leaders of our country that $1 million means that you’re a rich, while someone with $900,000 is not rich. I could go on with analysis about assets and earnings, and the capital component of any super pension income, but I will save that for a future article.
In any case, the former Prime Minister, Ms Julia Gillard publicly stated that the super benefits for over-60s will not be taxed. Tax-free super for over-60s remains in place – thank goodness! The new Prime Minister, Kevin Rudd, has promised that super taxes will not be changed for 5 years – believe it or not!
I explain how tax-free super benefits for over-60s operate later in this article.
Superannuation industry lobby for removal of tax-free super
So, we have the federal government stating in parliament that tax-free super for over-60s won’t be touched. Now, you would think the superannuation industry would be quietly celebrating and not drawing attention to any further opportunity to attack the benefits of retirees. Not so!
The Association of Superannuation Funds of Australia (ASFA), the peak superannuation industry body, which represents the superannuation industry and indirectly all Australians with superannuation accounts, recently made a submission to government as follows:
“If there were to be a cap on superannuation individual entitlements attracting tax concessions, then ASFA considers the figure should be in the order of $2.5 million and be indexed to average weekly ordinary time earnings (AWOTE) to reflect future increases in community and retirement living standards” (page 7 of ASFA’s Pre-Budget Submission for the 2013/2014 year).
I appreciate that ASFA were trying to mitigate the rumoured $1 million cap, but in both cases – $1 million or $2.5 million – there appears to be no understanding by the super experts: the people looking after our super benefits, that they know how super works in the real world. Where do they come up with these figures? Does it exclude the tax-free component? What if the pension account balance is intended to look after a couple (or even a family, with children staying at home longer)? And why was ASFA creating anxiety and uncertainty for the fund members it is supposed to be looking out for?
Rumours are causing a lot of unnecessary confusion for prospective and current retirees. Fortunately, the new Prime Minister, Kevin Rudd has promised not to tax the superannuation benefits for over-60s, or introduce or change any other super taxes for the next 5 years. Can we trust that he will keep to his word? The Liberal party have promised a watered-down version of ‘no changes to super’ during the first term of government. We will discover which party will deliver on these promises after the September 2013 federal election.
The superannuation and tax rules for over-60s remain in place, and are explained below.
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 retirement, 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 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.
What is particularly attractive for retirees is that since 2007, 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 2013/2014 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.
If you’re aged 65 or over, you can earn even more non-super income and pay no income tax (due to the application of the Senior Australians and Pensioners Tax Offset).
Public servants aged 60 or over may still pay tax on super
If you’re aged 60 or over and retired, your superannuation benefits 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) then your benefits may still subject to income tax after you turn 60, but less tax than if you were 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, and 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.
Note: More importantly, the age of 65 is the Age Pension age for Australian men and women close to retirement, although Age Pension age increases to 67 from 2023. 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.
Consider taking an income stream (superannuation pension)
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-free environment.
In comparison, if you invest your savings outside the super environment, the earnings on your savings are subject to income tax.
Important: The federal government has announced that from 1 July 2014, pension earnings that exceed $100,000 a year will be taxed at 15%, although the first $100,000 in earnings will remain tax-exempt. Note this tax is imposed on pension earnings, NOT on pension payments. The legislation is not yet in place for this proposed change.
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.
Summary table: Possible taxes on your super WHEN 60 YEARS OF AGE OR OVER
The summary table explaining super tax treatment for over-60s is set out below.
|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 before-tax superannuation contributions.|
|Additional contributions tax on those earning more than $300,000||15%||Additional tax applies to any eligible before-tax contributions, taking total contributions tax on these contributions to 30%|
|Earnings Taxes** ( accumulation phase) (does not apply to ‘untaxed’ schemes)|
|Investment Income Tax||15%||Tax on investment earnings.|
|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.|
|Earning Taxes** (pension phase)|
|Investment Income Tax||0%||No tax but proposed 15% tax on pension earnings above $100,000 a year, from 1 July 2014.|
|Capital Gains Tax (CGT)||0%||No tax but proposed 15% tax on pension earnings above $100,000 a year, from 1 July 2014. Special rules have been proposed for capital gains in pension phase.|
|Benefit Payment Taxes for Over-60s|
Super Lump Sums (60 year or over)
|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 $1.315 million (for 2013/2014 year).|
|Lump Sums (untaxed scheme)||45% (+ Medicare Levy)||Tax payable on ‘taxable component’ of benefits from UNTAXED source^^ above the UNTAXED plan cap amount of $1.315 million (for 2013/2014 year).|
Super Pensions (60 years and over)
|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|
|MTR + 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.|
*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’.
**No tax payable on earnings from pension assets, that is, assets financing a pension/income stream. Note that the federal government has announced a proposed 15% tax on pension earnings above $100,000 a year, expected to take effect from 1 July 2014.
^ 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. ^^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 illegal copying or illegal use will be vigorously pursued through legal channels.