Tax-free super for over-60s, except for some

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.

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 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 realised 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.

The new Liberal government, elected in September 2013, have promised ‘no changes to super’ during the first term of government. The superannuation and tax rules for over-60s remain in place, and are explained below.

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 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 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 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). 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 Take note: Age Pension age increasing to 67 years (not 70). 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.

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.

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.

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.
Capital Gains Tax (CGT) 0% No tax.
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.

^ 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.

© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.


IMPORTANT: SuperGuide does not provide financial advice. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.

Comments

  1. Peter Tieman says:

    Hi, I understand that if I take all or part of my superannuation it is TAX FREE as I am over the age of 60. My question is If I withdrew say 50,000 tax free do I still have to declare that as income on my nominal tax at the end of that financial year to the ATO. (and possible be charged tax or more tax as it would put you into a higher tax bracket) ??Thanks Peter

  2. Hi,
    Your page is very helpful.
    I wonder if I have this correct, from what you have explained:

    I have not worked since 2001.
    I am 64 years old, not receiving any centrelink payments, no payments for anything.
    My husband is 82.
    He receives an aged pension from Australia and overseas.
    Every year he fills in his tax form (due to receiving the overseas portion of his pension)
    Every year I haven’t had to fill one in.
    There have been no problems with this since 2001.
    The tax office has just sent him a bill for $1700 because he has not put in MY earnings. He said he has put in a ’0′ in the space for my earnings.
    So we wonder why suddenly, after this many years, the tax office has sent him a bill.

    I thought it may be because of my superannuation, which since I turned 60, I have withdrawn from occasionally. It is not a public super and there have never been any problems with the tax office about it.
    From what I read above in your articles, I should not have to pay any tax (I’ve never had any more than 200, 000 in it and now it is much less than 100, 000.

    I just wondered if you could shed some light on this.

  3. If enacted, do you understand that the proposed 15% Tax on SF earnings in excess of $100,000, will include Capital Gains on sale of assets within a SMSF?

  4. Chester Tong says:

    I will be 60 in Dec 2013. I will continue to work fulltime. Can I withdraw my lump sum super to pay off the mortgage ?

  5. Francis says:

    Hi
    is it true that you need to earn more than 80K to benefit in transition to retirement ( over 60 ) cause was told tax on 15% initial, then minus the 9% (employer) = 24%. It would be beneficial to set a trap.

  6. Is it cost effective for a 60 year old to start a TRIP within a SMSF which has pooled assets (husband60/Wife58) taking all setup costs, acturials/seggregate, administration and auditing into account. This would be just for the tax free benefit of the TRIP pension, we are already salary sacrificing the maximum amount allowed and don’t really need the TRIP pension income. The tax free benefit would be say 4.5% earnings on a TRIP of $600K with tax at 15% if not in pension mode = total of about $4K, or is there more to it than this calc.

  7. The loss to budget revenue by the introduction of tax free super to the over sixties was significant take a look at Peter Costellos budget forward estimates after its introduction,and the loss will only grow as more retire and the population ages it should also be noted that also as these people do not pay the medicare levy resulting in a significant the loss to healthcare and its this group who are the greatest users of the health system.I am over sixty five and get a tax free super payout in the form of a pension and i would be happy to contribute some small tax to help pay for health services and education
    David

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