If you retire before the age of 60, your super benefit payments are likely to be subject to tax — but not always. With the right structure, and usually with expert advice, many Australians retiring early can end up paying no tax.
If you’re willing to wait until you turn 60 before you retire, you can automatically receive your super benefits tax-free (unless you’re a member of certain public sector super schemes – see table later in the article).
Tip: Since 1 July 2017, many of the super tax rules changed, and the text below explains the tax rules for under-60s for the 2018/2019 year, for the 2017/2018 year. The tables contained in the links at the end of this paragraph provide summaries of the super tax applicable when super benefits are paid under the age of 60, see SuperGuide article Super tax tables: When UNDER 60 years of age.
Two important concepts: Preservation age and taxable component
Important: The most common way to access super benefits earlier than age 65, is to reach your preservation age and then retire. If you were born before July 1960, then your preservation age is 55 years. Preservation age increased to at least 56 years for Australians born on or after 1 July 1960, and can be up to 60 years, depending on date of birth. For more information on your preservation age see SuperGuide article What age can you access your super (Preservation Age)? or check out SuperGuide’s Retirement Age Reckoner.
Super benefits can be made up of two components — ‘tax-free component’ and ‘taxable component’. When you retire before the age of 60, the ‘tax-free component’ is, as you’d expect, tax-free, while the ‘taxable component’ is usually subject to tax (although depending on the size of the taxable component you may not have to pay tax). I explain the tax treatment of super benefits received before the age of 60, in the text below, and in the summary tables appearing in the SuperGuide article Super tax tables: When UNDER 60 years of age.
Taking a super benefit before the age of 60
How much tax you pay on your super benefit payment when you cash your super before the age of 60 depends on:
- The size of your super benefit. Assuming you have reached your preservation age, the first $205,000 for the 2018/2019 year (or the first $200,000 for the 2017/2018 year) of your taxable component, is tax-free when taken as a lump sum, except for certain benefits paid to some public servants. The tax-free limit of $205,000 (or $200,000) is known as the low-rate cap, and is an indexed lifetime limit (and is not a renewable limit that you can use afresh each time you take a super lump sum). Note that the low-rate cap is indexed each year. For more information about the taxable component of a super benefit, see SuperGuide article The tax treatment of super benefits and the proportioning rule.
- Whether your benefit includes a tax-free component, which you receive tax-free. The tax-free component represents your non-concessional (after-tax) contributions and, if you were a member of a fund before July 2007, several other elements of your super benefit. The tax-free component is always tax-free, regardless of your age when you retire. For more information about the taxable component of a super benefit, see SuperGuide article The tax treatment of super benefits and the proportioning rule.
- Whether you take a super pension/income stream.A superannuation lump sum is taxed differently from a benefit that you convert into a superannuation pension (a series of regular payments over a period of time). If you retire before the age of 60, you may receive a tax-free amount as part of your income stream, and you will also be eligible for a 15% pension offset on the taxable component of your benefit (except for certain benefits paid to some public servants). The pension offset reduces your tax bill, potentially to zero.
- Whether you receive a benefit from a taxed source or an untaxed source. You pay more tax when you receive a super benefit from an untaxed source — about 10 per cent of all superannuation accounts are from an untaxed source, and relate to benefits from older public sector super schemes (now closed to new members). The tax applicable to super benefits from an untaxed source is higher and more complicated (for more information, see Table 4 in the SuperGuide article Super tax tables: When UNDER 60 years of age).
Important: Regardless of your age, investment earnings derived from pension assets financing your super pension (in retirement phase) are tax-exempt. Note that since 1 July 2017, the earnings on assets financing a transition-to-retirement pension (TRIP) are no longer exempt from tax (such an income stream will not be considered to be in retirement phase): instead earnings will be subject to 15% tax (for more information on TRIPs, see SuperGuide article Guide to transition to retirement pensions.
Note: The other main exception to tax-exempt pension income applies to certain related party investments held by SMSFs, where income from those assets may be treated as non-arms-length income (NALI) and taxed at the highest marginal tax rate: for more information on NALI, see SuperGuide article SMSF investment rules: What every trustee should know).
Reminder: Super pension earnings are not the same thing as super benefit payments you receive.
Summary tables of super taxes for under-60s
For your convenience, we have included summary tables of super taxes for under-60s, in the SuperGuide article Super tax tables: When UNDER 60 years of age.
Important: We suggest that you refer to your accountant, or the ATO, for confirmation of how any super taxes apply to your personal circumstances. For information on how to consider the tax issues when taking your super before the age of 60 see also SuperGuide article Retirement: 3 ways of taking super benefits before the age of 60.
Over-60s: If you’re seeking information on how super benefits are treated if you withdraw super AFTER the age of 60, then see SuperGuide articles Tax-free super for over-60s, except for some and Super tax tables: When OVER 60 years of age.
Important: Special tax treatment applies for an individual suffering permanent disability, and receiving super benefits before preservation age due to permanent disability (a 15% tax offset is available on pension income). Different tax treatment also applies for individuals receiving death benefits from a super fund (see SuperGuide article Death and taxes: Guide to superannuation death benefits). See other SuperGuide articles (by using the search function) for more information on these topics, or refer to the Australian Taxation Office website.