SuperGuide.com.au » Superannuation Q&As

Is super pension income considered ‘assessable income’ or ‘total income’?

Trish Power — Sat, 28 Jan 2012 14:47:44 +0000

Q: Can you clarify whether income from a pension (from a taxed and/or untaxed super fund) is considered ‘assessable income’ and/or part of ‘total income’? Is it considered self-employment income or employer income?

You will need to confirm the specifics with your accountant, but whether income from a super pension is counted towards assessable income depends on the age of the recipient of the superannuation income stream. If the recipient is aged 60 or over, the pension income from a taxed source doesn’t count towards assessable income. If the recipient is under the age of 60 (and the benefit from a taxed source includes a taxable component), then the taxable component counts towards assessable income.

Note: the pension income (more specifically, the taxable component) of a benefit from an untaxed source is counted towards assessable income, regardless of the age of the recipient.

Background: The ATO states on its website: “Assessable income – This is a person’s ordinary income and statutory income before deductions are taken into account. Reportable employer super contributions do not form part of a person’s assessable income, but are added to it for a number of income tests that use expanded definitions of income.”

Pension income is not employment income, and nor is it self-employed income but it may form part of assessable income if the recipient is under the age of 60 and the pension income includes a taxable component; or if the recipient is any age and receives a benefit from an untaxed source.

I assume when you refer to ‘total income’ you are referring to the special income tests applicable for different entitlements such as, the ability to claim a super tax deduction or to be eligible for the co-contribution.

For example, looking at the co-contribution rules, you must satisfy two income tests both involving ‘total income’ definitions. The first test is the income threshold test, and the second test is the 10% eligible income test.

Total income for the income threshold test (quoting directly from the ATO website) is:

your assessable income for the income year
your reportable fringe benefits total (RFBT) for the income year
the total of your reportable employer super contributions
less
your allowable business deductions.

Total income for the 10% eligible income test is not reduced by allowable business deductions to ensure that self-employed individuals are not disadvantaged by low profit margins. According to the ATO, “For an individual to satisfy the 10% eligible income test, 10% or more of his or her total income must come from employment-related activities, carrying on a business or a combination of both. These amounts are referred to as eligible income amounts.”

Again, we are an information site rather than advisory site, and you will need to confirm your own circumstances with your accountant, or the ATO.

Does Trish Power offer personal financial planning advice?

Trish Power — Thu, 26 Jan 2012 20:38:38 +0000

Q: I have met many financial planners including 3 independent ones, but they don’t seem to know much and all said different things. They don’t seem to show interest and care for my retirement. I am a 61 year-old female and have no super. I need to do something fast. I am just a piano teacher and financially illiterate. I need help.

Thanks for your email. Unfortunately, we are not permitted to comment on specific set of circumstances. Also, I am not a licensed financial adviser so I’m not permitted to provide advice. We have taken this approach to ensure that our website remains independent of any influence.

We have hundreds of articles on the website and many cover retirement planning, which may provide some background information for you. You may find the following articles helpful, in your search for an adviser:

We also have our SuperGuide Directory where advisers can list their services for free. Note that this is a free directory for business listings, and we do not endorse or otherwise recommend the companies that are listing. We advise all users of the directory to conduct due diligence of any service provider’s credentials and experience before appointing a service provider.

You may be find some specialist advisers on this area by visiting the CPA Australia site and clicking on ‘find an accountant’, or by using a similar service on the ICAA site, the SPAA site, or the FPA site.

You may also wish to chat to the Financial Information Service which is a free government-funded service that helps Australians with retirement planning. They don’t sell anything and are part of Centrelink. You don’t have to receive Centrelink benefits to use this service. You can meet face-to-face with an officer and also attend free seminars (click on this link for more information).

You may also find useful my latest book which is called Super Freedom (a woman’s guide to superannuation) (Wrightbooks $32.95), which has been written with women like yourself in mind. You can find more information about this book by clicking here.

I’m under 60. Does my super payout also affect my other income, and tax bill?

Trish Power — Thu, 26 Jan 2012 15:29:38 +0000

Q: I have tried to phone the ATO re this query but can’t get through! Could you tell me the answer to this question? I turn 55 soon and I am eligible for a super payout of $165,554 next month of which only the $554 is taxable at 16.5%. However I still intend to keep working at my $58,000 a year job and wondered how this will affect the tax payable on my super.

We are an information site rather than an advisory site, and any tax questions need to be confirmed with a registered tax agent, such as accountant. Even so, I can offer you some general comments on the questions that you ask.

1. An individual can only access super benefits if they reach preservation age (currently 55) AND retire. If they don’t fall into this category then they must satisfy another condition of release to access super benefits. I explain the main conditions of release in the article 12 legal reasons to cash your super.

2. If your super benefits are classified as ‘unrestricted non-preserved’, then it is possible to access such benefits at any time. Some individuals who have been super fund members before 1999 may have some benefits that fall into this category.

3. Note that the low-rate cap for lump sum payments has increased to $165,000 for the 2011/2012 year (from $160,000 in the 2010/2011 year and $150,000 in the 2009/2010 year). If an individual is under the age of 60 and aged 55 or over, then the taxable component of any lump sum benefits within this cap are exempt from tax. The cap is a lifetime cap, rather than a cap for the taxable component of each specific lump sum payment. The tax-free component of a super benefit is always tax-free on payment, regardless of age.

4. The tax payable on super benefits is fixed but the benefit forms part of an individual’s assessable income. The ATO uses tax offsets to ensure the tax payable on the benefits is no more than the fixed benefit tax rate. For example, effective tax rate of 0% for the taxable component of lump sum benefit payments up to $165,000 (for the 2011/2012 year) and then the balance of the taxable component of the lump sum benefit is taxed at 16.5%. (The one exception is where you receive benefits from certain public sector funds and then the first $165,000 of the taxable component is taxed at 16.5%, and then the amount above $165,000 but below $1.205 million is taxed at 31.5% and the balance above $1.205 million is taxed the highest marginal tax rate (46.5%).)

5. According to the ATO your lump sum benefit will be treated as follows (see extract below or click on this ATO link).

How will the taxed element of my lump sum super benefit be taxed?
If you:
are between your preservation age and 60, and
receive a lump sum super benefit that includes or consists entirely of a taxed element
The taxed element is:
included in your assessable income, and
subject to tax at your marginal rates (plus Medicare levy).
You will receive tax offsets to ensure that:
the rate of tax is 0% on any amount that comes within the low rate cap ($165,000 for the 2011-12 income year), and
you pay no more than 15% tax (plus Medicare levy) on any amount above the low rate cap in an income year.
The low rate cap amount for 2011-12 is $165,000. It is indexed annually in accordance with average weekly ordinary time earnings. For the annual low rate cap amounts refer to Key superannuation rates and thresholds.
If you receive one or more lump sum super benefits in an income year, you need to reduce your low rate cap amount (but not below zero) for the next income year by the total of the amounts:
that are included in your assessable income for the first year (that is, the total taxable components of those lump sums), and
for which you received a tax offset for the first year.
If you receive a disability superannuation benefit as a lump sum, your tax-free component is increased to broadly reflect the period where you would have expected to have been gainfully employed. The tax-free component of your benefit is always not assessable and not exempt income, that is, it is tax-free.

Example [updated by SuperGuide]

Adapting an example from the ATO website, here’s how the super benefit is treated for tax purposes.

Michael is 56 and receives for the first time a lump sum super benefit of $300,000 on 25 July 2011. His super fund tells him that this amount consists of a tax-free component of $100,000 and a taxable component of $200,000. The taxable component consists entirely of a taxed element. Michael will pay no tax on the tax-free component of $100,000. He will include the taxable component of $200,000 in his personal income tax return as part of his assessable income. This amount will be subject to his marginal tax rate (plus Medicare levy). However he will receive tax offsets to ensure that he pays no tax on $165,000 (the low rate cap amount for 2011-12) and 15% tax (plus Medicare levy) on the remaining $35,000.

Again, we are an information site and I recommend that you chat to an accountant about your tax position. I hope this helps.

Do I pay tax on a super account in the last year of accumulation phase?

Trish Power — Thu, 26 Jan 2012 14:54:31 +0000

Q: On April 1 2012 I am transferring from accumulation phase to pension phase (I turn 65 on March 27 2012). Is my super fund subject to tax (for 2011/2012 year) on income earned up until the date of conversion, or is no tax payable because the fund has been converted to pension phase?

Earnings are taxable on a super account in accumulation phase, even when the account is in accumulation phase for only part of the year. A super fund may need to obtain an actuarial certificate to verify the earnings relating to accumulation phase, and to verify the tax-exempt earnings relating to pension phase.

The following articles may assist you further:

Does my superannuation pension income affect tax payable on other income?

Trish Power — Thu, 26 Jan 2012 14:11:51 +0000

Q: How does the income from an account-based pension affect taxation payable on other income received from salaries, dividends, capital gains and investments? Or, is there no affect whatsoever regardless of the amount of pension taken in any one year (assuming the minimum is taken).

The tax treatment of super income is usually different for those aged under 60, compared to those over the age of 60, which also has a different impact on non-super income.

You will need to check your personal situation with an accountant, but generally speaking, super pension income (from a taxed source) received on or after the age of 60 has no impact on tax payable on non-super income. Super pension income received before the age of 60 can have an impact on the amount of income tax that you pay on your total income, although you will be eligible for a 15% pension offset on the taxable component of super pension income.

The following SuperGuide articles should also assist you with your question:

Super contributions beyond the age of 75

Trish Power — Thu, 26 Jan 2012 04:41:35 +0000

Q: If the SG contribution age limit is being removed completely effective July 2013, does this mean that additional concessional or non-concessional contributions can also be made by those aged over 75?

A: The short answer is ‘no’. Although the Federal Government intends to remove the age limit for receiving Superannuation Guarantee contributions (effective from July 2013), the existing rules for voluntary superannuation contribution rules remain in place.

The existing rules relating to upper age restrictions for super contributions are:

Voluntary concessional (before-tax) contributions can be made until the fund member turns 75.
Non-concessional (after-tax) contributions can be made until the fund member turns 75.

Note: Anyone aged 65 years or over must satisfy a work test to be eligible to make a super contribution. Any super contribution made by an individual aged 74 must be received by the super fund within 28 days of the end of the month in which an individual turns 75. For example, if Gerard turns 75 in May, then his super contribution must be registered by his super fund by 28 June. Note that 28-day limit relates to when it is recorded as received by the fund, not when paid by the fund member.

I explain the over-65s work test, and the proposed removal of the age limit for SG contributions, in the following articles:

Non-concessional contributions at 64

Trish Power — Tue, 24 Jan 2012 15:48:11 +0000

Q: My wife turns 65 in early June 2012 . Can I make a spouse contribution of up to $450,000 before her birthday? Her last non-concessional contribution of $157,711 was made in 2008/2009.

I am not permitted to give advice, but I can provide you with a general answer. Generally speaking an individual who makes a contribution greater than $150,000 triggers the bring forward rules for the following two years. For example if an individual made a non-concessional contribution greater than $150,000 in 2008/2009, then the total contributions allowed over the 3 years (2008/2009, 2009/2010 and 2010/2011) would have been $450,000. The individual can then take advantage of a new bring forward in the 2011/2012 year, which is $450,000.

The general rule is that if an individual is under the age of 65 on 1 July of a financial year, then that individual can contribute more than $150,000 in non-concessional contributions in a single financial year, triggering the bring-forward rules. If such an individual makes the contribution after turning 65 in that financial year, then he or she must satisfy a work test.

You will need to verify your personal circumstances with your accountant, or the ATO.

The following articles should also provide more information on your question:

I retired at 59. Do I pay tax on my superannuation lump sum?

Trish Power — Tue, 24 Jan 2012 14:31:03 +0000

Q: I retired in September 2011. I’m now living on a tiny super pension since then of $640 a fortnight. In September 2011, I also received a $15,000 superannuation lump sum. The tax free component of my total superannuation is 66% and the taxable component (element taxed in the fund) is 34%. I turn 60 in February 2012. Do I have to pay any tax on the lump sum, or the super pension I’m living on, in relation to before I turned 60? I thought everything was tax free, even though I was 59, because the amounts I’ve received are so tiny. But many people I’ve spoken to seem to think I’ll have to pay some tax. All the official guidelines are so complex they are near impossible for me to fully understand.

You will need to talk to an accountant who can probably answer your query fairly quickly.

Generally speaking, anyone on a taxable income of $16,000 dollars a year would pay no tax (for the 2011/2012 year) and only a slight amount of tax if on an income slightly above $16,000 – if a pension tax rebate is active then it is highly unlikely any tax is payable.

In relation to a lump sum, any tax payable depends on whether you have taken super benefits in the past, and your age when you receive the super benefits. The tax-free component of a super benefit is always tax-free, regardless of an individual’s age. The taxable component of a lump sum is tax-free when received after turning 60, except when receiving benefits from certain public sector super funds.

The taxable component of a benefit is subject to tax when received before the age of 60, although you can access up to $165,000 (for the 2011/2012 year) of the taxable component free of tax. Note the $165,000 (indexed) is a lifetime limit and may take into account super benefits received in the past.

In relation to the impact of your lump sum on your other income, the SuperGuide article I’m under 60. Does my super payout also affect my other income, and tax bill? should assist.

You can also find other articles on SuperGuide that explain the tax treatment before and after 60.

Can I withdraw super if the bank is foreclosing on my mortgage?

Trish Power — Sat, 14 Jan 2012 01:52:17 +0000

Q: I’d like to get help with withdrawing my super as I’m in financial difficulty and I’m concerned that the bank could foreclose on my mortgage.

I’m sorry to hear that you are having difficulties. The first step in finding out whether you can access your super benefits is to talk to your super fund. Your super fund must check that you satisfy certain conditions before they can release your super funds due to financial hardship. The financial hardship provisions are explained in the article 12 legal reasons to cash your super, and your super fund should also have more detailed information to assist you.

If the bank is going to foreclose on your mortgage, then you may be able to access your super benefits under compassionate grounds. You then must apply to Centrelink. Your fund should also have information on this, and you can find additional information on compassionate grounds on the Centrelink website here.

SMSFs: Calculating tax-free components

Trish Power — Sat, 14 Jan 2012 01:19:08 +0000

Q: Assuming my SMSF today has an tax-free component of 40% of the total, and in the future I roll over an employer based super into my SMSF, does the tax-free component remain at 40% of the new total or does it have to be recalculated?

We are an information site rather than an advisory site, so we cannot provide specific advice on the component calculation, but we can provide you with general information on the question that you ask.

In short, the tax-free component is recalculated but the timing of this calculation depends on whether you take a lump sum or income stream.

The article SMSFs: What is the proportioning rule? will best assist you.

If I ‘retire’, how soon can I return to work?

Trish Power — Sat, 14 Jan 2012 01:08:02 +0000

Q: I am 56 and plan to retire and take my super as a lump sum, primarily to pay off debts. Am I then able to:

Return to work again and earn an income? And if so, how much?
How soon after I retire and take a lump sum before I am able to return to the workforce? Am I entitled to work again and earn? Does it have to be part-time or casual?

I have answered similar questions to your own on our website over the past few months and you can read my response to a question nearly identical to your own in the article Super for beginners, Part 9: If I retire and take my super, can I return to work?

You also ask what is a reasonable timeframe between retiring and returning to work. The key issue is the intention of the individual at the time of retirement, although anecdotally I understand that 6 months is a common timeframe for individuals to get restless after retiring.

Note that this comment cannot be taken as advice or be relied upon for your decision-making. I make this comment merely to assist you in your endeavours for further information.

Also note that tax may be payable on super benefits taken before the age of 60.