Q: I retired in October 2018. I now live on a tiny super pension of about $900 a fortnight. In October 2018, I also received a $15,000 superannuation lump sum. The tax-free component of my total superannuation is 66% and the taxable component is 34%. I turn 60 in February 2019. Do I have to pay any tax on the lump sum, or the super pension I’m living on, in relation to the amounts 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.
The answer we provide below is of a general nature and is for information purposes only, and cannot be considered specific or general advice. SuperGuide provides information about how the super and retirement rules work, including how the super tax rules work (and often illustrates using helpful examples), rather than providing financial advice.
Also, you may wish to chat to Centrelink about any benefits you may be entitled to, such as the Low Income Health Care Card, which is available to low-income households, including single people and families (click here for information about the LIHCC). Generally speaking, when an individual on this level of income reaches Age Pension age, they are also likely to receive a substantial part Age Pension. For more information on the Age Pension rules, see the special SuperGuide section Age Pension.
Note: Generally speaking, anyone on a taxable income of $20,542 dollars or less a year pays no income tax (for the 2018/2019 year) due to the effect of the tax-free threshold of $18,200 and low income tax offset (of up to $445, for the 2018/2019 year). A taxpayer is eligible for the full low income tax offset of $445 (for 2018/2019 year) if taxable income is less than $37,000 a year. Using an example, assuming no other sources of income, a fortnightly income of $900, works out to be roughly $23,400 a year, which means roughly $485 of income tax a year is payable on taxable income, after allowing for tax offsets of $645. For more information on LITO, see SuperGuide article LITO: What is the Low Income Tax Offset, and how does it work?. For four financial years, from 1 July 2018 until 30 June 2022, the federal government has also introduced another tax offset, called the Low and Middle Income Tax Offset (LAMITO), which applies to any taxpayer with a taxable income less than $125,333 a year, but the taxpayers who benefit the most from LAMITO (receive the maximum offset of $530) are those taxpayers earning a taxable income of between $48,000 and $90,000, and those earning less than $37,000 can receive a LAMITO of $200 a year. For more information on LAMITO, see SuperGuide article LAMITO: What is the Low and Middle Income Tax Offset, and how does it work?
Before we respond to the bulk of your question, we will explain how the rules applying to tax-free super benefits on or after the age of 60, works. If you receive super benefits from your super account (assuming taxed source) on or after turning 60, then those lump sum or pension benefits are tax-free. If you receive super benefits before your 60th birthday, then whether tax is payable depends on your preservation age, the size of the super benefits, the components of your super benefit, if you take the super benefit as a lump sum or pension, and whether you have withdrawn any super benefits in the past.
Is tax payable on my super pension payments?
In most cases, superannuation pension income received before the age of 60 (and on or after preservation age) is counted towards a person’s assessable income for tax purposes. The tax-free component of a super pension payment is tax-free and not counted towards assessable income, while the taxable component of a pension payment does count towards assessable income, but receives a 15% pension offset. The pension offset can reduce any tax payable on the super pension income.
For an individual with a taxable income of less than $20,542, no income tax is payable, and a second tax offset is available for 4 financial years (2018/2019 year through to 2021/2022 year). If an individual has a taxable income that is slightly above $20,542, again it is highly unlikely that income tax is payable on pension income, due to the effect of the 15% pension tax offset. Depending on the proportion of tax-free and taxable components of a super pension, no income tax may be payable at higher income levels as well.
If a person takes super benefit before the age of 60, and preservation age is 60, then the 15% pension offset is not available. For more information on tax on super benefits, see SuperGuide articles Retiring before the age of 60: the tax deal and Retirement: 3 ways of taking super benefits before the age of 60.
Note: Preservation age varies depending on your date of birth. Anyone born before July 1960 has a preservation age of 55, while anyone born on or after 1 July 1960 has a preservation age of at least 56 years, and anyone born on or after 1 July 1961 has a preservation age of at least 57 years, and anyone born on or after 1 July 1962 has a preservation age of at least 58 years, and anyone born on or after 1 July 1963 has preservation age of at least 59 years, and can be as high as 60 years for those after June 1964. For more information on your preservation age see SuperGuide article Accessing super: What is my preservation age?
Is tax payable on my super lump sum?
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 on or after turning 60, except when receiving benefits from certain public sector super funds.
The taxable component of a lump sum benefit may be subject to tax when received before the age of 60 (and on or after preservation age), although you can access up to $205,000 (limit applicable for the 2018/2019 year) of the taxable component as a lump sum., free of tax. Note the $205,000 (indexed) is a lifetime limit and may take into account super benefits received in the past.
Note: If you withdraw a super lump sum, you cannot cherry pick the benefit component that you withdraw. The lump sum must reflect the proportion of tax-free component and taxable component of the super benefit. For example, if the super benefit is 75% taxable component, and 25% tax-free component, then the $15,000 lump sum would be $11,250 taxable component (75%), and $3,750 tax-free component (25%).
Important: 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.
The following SuperGuide articles also explain the tax treatment of superannuation benefit payments received before and after the age of 60: