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 large number of emails I have received about this topic in recent months, 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 super benefits received by over-60s in the table at the end of this article.
Note: 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 was going to be removed?
The news reports were incorrect, but at the time those reports were based on deliberately leaked information from former ALP 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 realised it would be political suicide to remove the tax-free status of retirement benefits, and for not much financial reward.
In February 2015, the rumours have begun again that tax-free super for over-60s may be changed. Good luck to the government that decides to win an election on that policy!
The reason the former Liberal federal government introduced tax-free super in 2007 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.
The relatively new Liberal government, elected in September 2013, has promised ‘no changes to super’ during the first term of government. We now know that this promise is a porkie pie because it seems that is all anyone has been talking about. Okay, the possible changes to super may not be implemented until after the next election, but talk about a government talking constantly and achieving very little in terms of retirement income policy discourse. In the forseeable future, the superannuation and tax rules for over-60s remain in place.
I explain how tax-free super benefits for over-60s operate later in this article, 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.
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 2014/2015 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). For more information about SAPTO see SuperGuide article No tax in retirement because you SAPTO.
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), however, 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. 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.
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 years from 2023 (see SuperGuide article Age Pension age increasing to 70 years). If the Liberal government has its way, the Age Pension will be increasing to age 70 for anyone born after 1964.
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-exempt environment.
In comparison, if you invest your savings outside the super environment, the earnings on your savings are 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.
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 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 (adjusted taxable income), taking total tax on concessional contributions to 30%|
|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?|
|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% (+ 2% Medicare levy)||Tax payable on ‘taxable component’ of benefits from UNTAXED source^^ up to the UNTAXED plan cap amount of $1.355 million (for 2014/2015 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 $1.355 million (for 2014/2015 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, but received 10% pension offset against taxable component.|
*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.
^ 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 unauthorised copying or use will be vigorously pursued through legal channels.