No tax in retirement because you SATO

This article is updated annually with new rates, or periodically to highlight changes (if any) to the Senior Australians Tax Offset rules. The latest article updates are: adding the Senior Australians Tax Offset (SATO) rates for the 2011/2012 year, occurred on 26 July 2011, and then, including further explanation and additional ATO information on 25 June 2012. This article includes SATO rates for the 2011/2012, 2010/2011, 2009/2010 and 2008/2009 years. Since 1 July 2012, SATO has been renamed as the  Senior Australians and Pensioners Tax Offset (SAPTO).

The superannuation tax rules are not the only tax benefits that you can take advantage of in retirement. If you are aged 60 or over, your superannuation benefit from a taxed source is not included as part of your assessable income. Most Australians receive super benefits from a taxed source, unless you’re a member of one of the older public sector super funds.

The tax consequences of the super rules are quite incredible.

1. You can earn non-super income in addition to your tax-free super benefit and take advantage of the tax-free threshold of $6,000 (if under Age Pension age) and the low income tax offset (LITO) of up to $1,500 (for the 2011/2012 year). You could take advantage of similar tax treatment for the 2010/2011 year.
2. If you’re under Age Pension age, you can earn non-super income of up to $16,000 for the 2011/2012 year (as you could for the 2010/2011 year) before any tax is payable.
3. The tax rules get even better when you reach the age of 65. If you’re Age Pension age (currently 65 for men and 64.5 years (since January 2012) for women) or older, you may be able to access more generous tax-free thresholds, known as the Senior Australians Tax Offset (SATO). If you’re single, you can earn up to $30,685 in the 2011/2012 year (which was also the same level of income for the 2010/2011 year) in non-super income without paying a cent of tax because of the application of SATO and LITO.
4. This $30,685 of ‘income’ for the 2011/2012 year (and also for the 2010/2011 year) is in addition to any superannuation benefit that you receive from a taxed source.
5. If you earn more than $30,685, or $26,680 each as a couple (for 2011/2012 year and also for 2010/2011 year), you will still be able to access the SATO, but it will be a reduced tax offset. What this means is that some income tax will be payable if your ‘rebate income’ exceeds the lower income threshold of $30,685 (for a single person) or $26,680 each for a couple.

Note: The income test for SATO is based on income known as ‘rebate income’ which includes:

• taxable income
• personal deductible contributions and Superannuation Guarantee contributions (reportable super contributions)
• total net investment loss
• adjusted fringe benefits (reportable fringe benefits x 0.535)

A couple who have reached Age Pension age, can earn a ‘rebate income’ of up to $26,680 each ($53,360 combined) for 2011/2012 year (and also for the 2010/2011 year) without paying income tax, subject to certain conditions.

Again, this income is in addition to any super benefits from a taxed source. The combination of SATO and tax-free super for over-60s means that Australians of Age Pension age or over can enjoy even greater tax-free income.

And there’s more…

Individuals who have reached Age Pension age have considerable scope to take advantage of the SATO. The text below explains the cut-out income thresholds for SATO for the 2011/2012 and 2010/2011 years, the 2009/2010 year and the 2008/2009 year.

For 2011/2012 and 2010/2011 years

A couple earning rebate income greater than $53,360 a year (for 2011/2012 or for 2010/2011 years) are still eligible for the Senior Australians Tax Offset but they will receive a lower tax offset, which means that some tax is generally payable. SATO still applies to ‘rebate income’ of up to $48,525 for a single person and $78,992 ($39,496 each) for a couple (for the 2011/2012 or 2010/2011 years), which means you still pay tax but not as much.

Note: If an individual’s or couple’s income exceeds the cut-out income threshold, they are no longer eligible for the Senior Australians Tax Offset. Such a taxpayer is then treated like any other taxpayer, and subject to ordinary income tax rates (for the latest marginal income tax rates see SuperGuide article For your convenience: Income tax rates for the 2012/2013 year).

Notes: Combined effect of the SATO and LITO is that, at maximum tax offset eligibility, no tax is payable. ‘Rebate income’ above the cut-out thresholds means no SATO is available, and a part offset is available for income between full offset and cut-out income threshold. The SATO reduces by 12.5 cents for each $1 of taxable income above the Full Offset Income Threshold (officially known as the ‘Shade-out threshold’).

Note: Each member of a couple is tested separately for SATO eligibility. If a member of a couple earns more than the cut-out income threshold ($39,496 for the 2011/2012 or 2010/2011 year), then that member of the couple is not eligible for SATO. If both members of a couple are eligible for SATO, and you do not fully use the SATO (for example, you earn less than $26,680 for the 2011/2012 year or for the 2010/2011 year) then you may be able to transfer the unused portion to the other member of the couple.

If a couple’s income exceeds the cut-out income threshold of $78,992 (for the 2011/2012 or for the 2010/2011 year), they are no longer eligible for the offset. A couple is then treated like any other taxpayer and is taxed on taxable income less the $6,000 threshold (confirm your specific tax position with your accountant or the ATO).

Completing tax returns: Each year, the ATO publishes information on its website to assist taxpayers who are seeking to claim SATO, and to ensure taxpayers complete the income tax return correctly. You can access the instructions for completing the relevant sections (T2) on the 2011/2012 income tax return by clicking on this link.

For 2009/2010 year

A couple earning rebate income greater than $51,360 a year (for 2009/2010) are still eligible for the Senior Australians Tax Offset but they will receive a lower tax offset, which means that some tax is generally payable. SATO applies to ‘rebate income’ of up to $47,707 for a single person and $76,992 ($38,496 each) for a couple (for the 2009/2010 year), which means you still pay tax but not as much.

Note: If an individual’s or couple’s income exceeds the cut-out income threshold, they are no longer eligible for the Senior Australians Tax Offset. Such a taxpayer must then rely on the tax offsets, such as LITO, that apply to all eligible taxpayers.

Notes: Combined effect of the SATO and LITO is that, at maximum tax offset eligibility, no tax is payable. ‘Rebate income’ above the cut-out thresholds means no SATO is available, and a part offset is available for income between full offset and cut-out income threshold. The SATO reduces by 12.5 cents for each $1 of taxable income above the Full Offset Income Threshold (officially known as the ‘Shade-out threshold’).

Note: Each member of a couple is tested separately for SATO eligibility. If a member of a couple earns more than the cut-out income threshold ($38,496) for 2009/2010 year, then that member of the couple is not eligible for SATO. If both members of a couple are eligible for SATO, and you do not fully use the SATO (for example, you earn less than $25,680 for 2009/2010 year) then you may be able to transfer the unused portion to the other member of the couple.

If a couple’s income exceeds the cut-out income threshold of $76,992 (for 2009/2010 year), they are no longer eligible for the offset. A couple is then treated like any other taxpayer and is taxed on taxable income less the $6,000 threshold (confirm your specific tax position with your accountant or the ATO).

For those yet to prepare tax returns for the 2008/2009 year, the SATO thresholds for the 2008/2009 financial year are listed in the table below. Note that reportable super contributions are not counted as income for SATO eligibility for the 2008/2009 year.