- Want your super benefit? Then get ready to meet a condition of release
- Withdrawing your super
- Accessing super before age 60: Terms you need to know
- 1. Under your preservation age: Tax implications
- 2. Over your preservation age but under 60: Tax implications
- 3. Untaxed defined benefit fund members: Tax implications
- 4. Temporary residents: tax implications
- Tax time: Filling in your tax return
Many people dream about retiring early, taking their super and heading off to enjoy their remaining years, but it’s important to understand the tax implications before you take the plunge. Even if you are retiring you may not be able to access your super if you are under age 60 and if you do, the tax man is sure to take a cut.
So, just what are the taxes that could apply if you access your super under age 60?
Want your super benefit? Then get ready to meet a condition of release
As your super savings are designed to be used in your retirement, there are strict rules governing your ability to access your super before you reach your preservation age (see later in the article) and only very limited circumstances in which this will be permitted. You will need to speak to your super fund to apply for access before reaching your preservation age.
Once you have reached your preservation age, it’s easier to access your super benefits, but you still need to meet a condition of release and some of these restrict whether you can take a lump sum or income stream.
For more information, see SuperGuide article When can I access my super? All conditions of release explained.
Withdrawing your super
When you meet a condition of release and apply to access your super benefit, you can generally choose to withdraw an amount from your super as an income stream, lump sum or a combination of the two, but it’s worth noting the option you choose will have an impact on the amount of tax you pay on the benefit (see later in the article).
- Income stream (super pension or annuity): If you decide to take a super income stream, you will receive a series of regular payments from your super fund. These must be paid at least annually and must meet the minimum annual payment rules.
- Lump sum: This is a single payment that withdraws some or all of your super. It’s important to remember if you take a lump sum the money is no longer within the super system and if you invest it, any return on those investment will not be taxed as super savings. This means the concessional tax rate of 15% on your super account’s earnings will no longer apply. If you invest your super benefit outside the super system, investment earnings are taxed at your marginal or top tax rate, which can be as high as 45% (plus the Medicare levy).
Accessing super before age 60: Terms you need to know
Like all things to do with super, withdrawing your super benefits before age 60 means learning a whole lot of new jargon. Although they sounds pretty boring, each of these factors helps determine how much – if any – tax you will pay when withdrawing your super benefit.
To work out how your super benefit will be taxed you need to know:
- Your tax-free and taxable components
- Your preservation age
- The current low-rate threshold or cap
- Whether you plan to take a lump sum or an income stream.
Tax-free or taxable? Learning about the different components of your super benefit
Your super account contains both tax-free and taxable components.
- The tax-free component mainly consists of your non-concessional (after-tax) contributions into your super account, as these amounts come from income on which you have already paid tax. (If you were a member of a super fund before July 2007, you may also have other tax-free amounts in your super account.)
- The taxable component typically comes from concessional (before-tax) contributions made by you over time. These include employer contributions (such as SG contributions), salary sacrifice contributions and any super contributions for which you claimed a tax deduction.
In most cases, your super fund will have paid the 15% contributions tax on the taxable super contributions that make up your taxable component. This part of your super benefit is called the taxed element of your taxable super component (taxable component – taxed element).
If your super fund has not paid tax on any part of your taxable super component, those amounts are called the untaxed element of your taxable component (taxable component – untaxed element).
Any lump sum withdrawals from your super account must be made in the same proportions as your tax-free and taxable components. You cannot choose to withdraw only from the tax-free component. This requirement is known as the Proportioning Rule.
Your annual statement from your super fund will normally indicate both the tax-free and taxable components of your super account. If not, call your fund and they will be able to work it out for you.
What’s my preservation age?
Before you get too excited about getting your hands on your super savings, it’s important to understand the rules about the age at which you can access your super account.
Your preservation age varies depending on your date of birth and is listed in the table below. If you were born after 1 July 1964, you are not permitted to access your super benefit until you reach age 60.
Preservation age based on date of birth
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|From 1 July 1964||60|
Important: Your preservation age is not the same as the age you can apply to receive the Age Pension. Your preservation age only relates to accessing the benefits in your super account.
Low-rate threshold or cap
When you withdraw your super benefits as a lump sum before you reach age 60, the amount you take below the low-rate threshold is tax-free. In 2018/2019, the low-rate threshold or cap is $205,000 ($200,000 in 2017/2018) and is the amount of your taxable component you can take tax-free as a lump sum.
The low-rate cap amount is a limit set on the amount of taxable components (both taxed and untaxed elements) of a super lump sum that can receive a lower (or nil) rate of tax. It applies to people who have reached their preservation age but are below 60 years.
This is a lifetime limit – which means it is the total amount you can take over your lifetime even if you make several withdrawals – and it is indexed annually.
Any amount over the low-rate threshold is taxed at 17% (including the Medicare levy) or your marginal tax rate, whichever is lower.
Lump sum or income stream: which is better?
Unfortunately, there is no easy answer to this question, as it depends on your personal circumstances and age.
Once you become eligible to access your super account, it’s important to remember you have a number of options, including leaving some or all of your savings in your current super fund to continue growing. Even if you take some of your account balance, most super funds are happy to continue looking after your remaining retirement savings.
If you decide to access your super, you can take all or some of your super account balance as either a lump sum or income stream (super pension). Most super funds offer a range of pension accounts to their fund members and these offer a wide choice of investment options. If you are satisfied with your current super fund, this may be a good option to consider.
1. Under your preservation age: Tax implications
If you withdraw some of your super benefit before you reach your preservation age, you will pay tax on your super savings whether you take a lump sum or choose an income stream.
On the other hand, if you wait until you are age 60, your withdrawal will be tax-free. (Different rates apply to untaxed funds, such as government super funds.)
If you are under your preservation age, no tax is payable on the tax-free component of your super if you withdraw it as a lump sum or receive an account-based income stream.
When it comes to the taxable component of your payment, it will be taxed* as follows:
|Type of super||Type of withdrawal||Effective tax rate (including Medicare levy)|
|Taxable component – taxed element||Income stream||Your marginal tax rate. However, if you receive the income stream as a disability super benefit, you are entitled to a tax offset of 15% on the taxed element|
|Taxable component – taxed element||Lump sum||Your marginal tax rate or 22%, whichever is lower|
|Taxable component – untaxed element||Income stream||Your marginal tax rate|
|Taxable component – untaxed element||Lump sum||Your marginal tax rate or 32%, whichever is lower – unless the lump sum is more than the untaxed plan cap (see below)|
Note: Other tax rates may apply if you access your super due to a terminal medical condition, permanent incapacity, are a temporary resident leaving Australia permanently, or it is a super death benefit.
Table source: ATO website
Note: The untaxed plan cap amount is the maximum amount of untaxed elements in a super benefit that can take advantage of the lower or concessional tax rates applying to withdrawals of your super savings. Any amount over the untaxed plan cap is taxed at the top marginal tax rate.
If you receive a lump sum from several super funds, the untaxed plan cap applies to the amount from each super fund.
In 2018/2019 the untaxed plan cap is $1.480 million and for 2019/2020 it is $1.515 million.
Case study 1
When she was diagnosed with a serious illness, 51-year-old Yuki applied to her super fund to withdraw some of her super as she needed additional funds to help pay for her medical care.
Her super fund agrees to pay her a lump sum of $15,000, of which $2,000 is tax-free. The remaining $13,000 is a taxable component with no untaxed element.
At tax time, Yuki includes the $13,000 in taxable super with her income for the year. She pays tax on the $13,000 at either her marginal tax rate or at 22%, whichever is lower.
2. Over your preservation age but under 60: Tax implications
If you withdraw some of your super benefit under the age of 60 but after you have reached your preservation age (55 to 59 depending on your date of birth), you will pay tax on some elements of your super benefit whether you take it as a lump sum or an income stream.
You do not pay tax on the tax-free component if you withdraw it as a lump sum or receive an account based income stream.
The taxable component of your super benefit will be taxed as follows:
|Type of super||Withdrawal type||Effective tax rate – including Medicare levy and up to the low-rate cap*||Effective tax rate – including Medicare levy and above the low-rate cap*|
|Taxable component – taxed element||Income stream||Your marginal tax rate less 15% tax offset||Your marginal tax rate less 15% tax offset|
|Taxable component – taxed element||Lump sum||0%||Your marginal tax rate or 17%, whichever is lower|
|Taxable component – untaxed element||Income stream||Your marginal tax rate||Your marginal tax rate|
|Taxable component – untaxed element||Lump sum||Your marginal tax rate or 17%, whichever is lower||Your marginal tax rate or 32%, whichever is lower – unless the lump sum is more than the untaxed plan cap ($1.480 million in 2018/2019). In this case the amount above the cap is taxed at the top marginal rate|
* Low-rate cap is $205,000 in 2018/2019
Table source: ATO website
Case study 2
When he retired in January 2019 at age 58, Sando applied to his super fund to access his super benefit of $450,000. The super fund notified him that his super benefit consisted of a $150,000 tax-free component (which was all taxed in the fund), and a $300,000 taxable component.
When lodging his 2018/2019 income tax return, Sando is only taxed on the $300,000 taxable component, as the remaining $150,000 is tax-free.
Sando will be required to pay some tax on the taxable component – taxed element of his lump sum. He pays 0% on the amount up to the low-rate cap (the first $205,000 of his benefit) and 17% on the $95,000 which is over the cap.
3. Untaxed defined benefit fund members: Tax implications
Defined benefit super funds are usually large corporate or government employer super funds and the tax rules for members of these funds are generally the same as for other types of super funds.
Different tax rates apply, however, if you are a member of an untaxed defined benefit scheme (a limited number of public sector schemes). The majority of super funds are taxed super funds, meaning the fund has paid tax on behalf of their members.
Important: Working out the tax applying to the withdrawal of super benefits from a untaxed defined benefit super fund is very complex and you should contact your super fund, an experienced tax accountant or an independent financial adviser for advice about your particular situation before applying to withdraw your benefit.
The following tax rates apply when withdrawing benefits from an untaxed super fund:
|Under your preservation age and member of an untaxed super fund|
|Reached preservation age but under 60 and member of an untaxed super fund|
4. Temporary residents: tax implications
If you have worked in Australia as a temporary resident and apply for a Departing Australian Superannuation Payment (DASP), you may have to pay tax on your super benefit.
From 1 July 2017, if you are a working holiday maker the entire taxable component in your super benefit is taxed at 65%.
If you are a non-working holiday maker, the taxable component is taxed at 35% for the taxed element and 45% for the untaxed element of your super benefit.
Tax time: Filling in your tax return
When tax time rolls around, you will need to include details of the benefit payment from your super fund in your annual tax return.
1. Under preservation age
If you are under the preservation age, you will receive a payment summary from your super fund showing how much of the super benefit you received during the year is taxable and how much is tax-free. It will also note any tax withheld from the super benefit and any tax offsets on the taxed element of your super.
To complete your tax return, you need to include the taxable component of your super benefit with your income for the year. If you received an income stream, include the tax offset for the income stream in the offset section of your tax return. The ATO will calculate any offsets applying to super lump sums.
2. Over preservation age and under 60
If you are over your preservation age but under age 60, you will receive a payment summary from your super fund showing the taxable and tax-free amounts in any super benefit your received during the year. It will also show how much tax was withheld from the super benefit and any tax offsets applying to the taxed element.
If you received a super death benefit capped defined benefit income stream, you can use the ATO’s Defined benefit income cap tool to work out the amounts you need to include in your income tax return.
To complete your tax return, you need to include the taxable component of your super payment with your income for the year, even if the amount you receive is below the low-rate cap and no tax was withheld by your super fund.
If you received an income stream, include the tax offset for the income stream in the offset section of your tax return. The ATO will calculate any offsets applying to super lump sums.