- How does tax-free super for over-60s work?
- What does tax-free super mean for other non-super income?
- Turning 60, and turning 65, are significant
- Consider taking a super pension (superannuation income stream)
- Summary tables of super taxes for over-60s
- What about the news reports that tax-free super should be removed?
If you withdraw your super benefits after you turn 60 years of age, you can expect to pay NO tax on those super benefit payments, unless you are a member of certain types of public sector super funds. Further, since 1 July 2017, certain recipients of private and public defined benefit pensions will also pay tax, or pay more tax, on super pension payments (for summary super tax tables see SuperGuide article Super tax tables: When OVER 60 years of age ).
Due to the large number of emails we receive on this topic, we’ll repeat the standard rule for most Australians: if you withdraw super benefit payments on or after the age of 60, your super benefit payment will be free of benefit payments tax and income tax. The two main exceptions to this standard rule are:
- where you are a member of an untaxed scheme (some public sector funds, and some tax may still apply), and
- since 1 July 2017, certain recipients of private and public defined benefit pensions.
We summarise the tax treatment of super benefits received by over-60s later in the article, and provide summary tables in the SuperGuide article Super tax tables: When OVER 60 years of age).
Note: Since 1 July 2017 there is now a limit on the amount of super you can transfer to retirement phase within the superannuation system (for more information on your transfer balance cap see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap). This new measure also affects the tax treatment of defined benefit pension payments (see SuperGuide article Defined benefit pensions and the $1.6 million transfer balance cap).
Important: Although most superannuation benefit payments are tax-free when received on or after the age of 60, you still must satisfy a condition of release, such as retiring from the workforce or starting a transition-to-retirement pension, to access your super benefits before the age of 65. For more information on conditions of release, see SuperGuide article Accessing super early: 14 legal ways to withdraw your super benefits.
If you are seeking information on the tax treatment of super benefits taken before the age of 60, then check out the SuperGuide articles Retiring before the age of 60: the tax deal and Super tax tables: When UNDER 60 years of age.
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 retiring, or starting a transition-to-retirement pension), you can receive your superannuation benefit payments 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 not unlike what you now have to do if you plan to have close to $1.6 million in super when you retire.
And before July 2007, how much super you could receive at concessional rates was limited (see end of article for a history of the taxation of super benefits). From July 2007 until 30 June 2017, there was no cap on the amount you could transfer to retirement phase, although there were (and continue to be) limits on the amount you could contribute to a super account. For more information on what retirement phase means for your super benefits, see SuperGuide section Retirement phase (formerly called Pension phase).
Important: Since 1 July 2017, the Coalition government re-introduced an effective cap on the amount of tax-exempt earnings a fund member can generate on his or her super pension account (by capping pension transfer balances to $1.6 million). Note that this new cap is a separate measure to tax-free super benefit payments. In terms of super benefit payments however, since 1 July 2017, certain recipients of defined benefit pension payments will now be paying tax (or paying more income tax if from an untaxed source) on pension payment income.
Public servants aged 60 or over, may still pay tax on super, and since 1 July 2017, certain private and public defined benefit pension recipients may pay tax: If you’re aged 60 or over and retired, your superannuation benefit payments 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 be subject to income tax after you turn 60, but less tax than if you were receiving your super benefits under the age of 60. And since 1 July 2017, if you are in receipt of a defined benefit pension (regardless of whether your DB pension is from a taxed source or an untaxed source), you may pay more tax.
Tip: For a summary of the specific tax rates for super benefits paid from an untaxed source on or after the age of 60, and the tax impact of the 1 July 2017 super changes, see Table 4 in SuperGuide article Super tax tables: When OVER 60 years of age .
What does tax-free super mean for other non-super income?
Notwithstanding the new transfer balance cap since July 2017 restricting the amount of savings you can have in retirement phase, super pension benefit payments are still treated as tax-free income because way back in 2007, the government changed the super tax rules to make this happen.
The consequence of super pension payments not being assessable income, means that an individual can earn non-super income in addition to superannuation pension payment income, and still pay little or no tax because superannuation benefit payments are not counted as income for tax purposes (except for certain public sector fund members and since 1 July 2017, certain defined benefit pension recipients).
What this means is that the benefit payments from your superannuation fund, received on or after the age of 60, are not included in your tax return. For example, a person can, say, receive $80,000 pension payment income from their super fund, and $18,200 (for the 2017/2018 year) from part-time work and pay no tax, and potentially earn up to $20,542 of non-super income tax-free, when taking into account the Low Income Tax Offset (for information on LITO, see SuperGuide article LITO: What is the Low Income Tax Offset and how does it work?
If you’re aged 65 or over, you can potentially 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.
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.
Turning 65 remains important in super terms for those Australians who want to continue working but access all of their super benefits, either as a lump sum or as a super pension. If you turn 65 years of age, this milestone is considered a condition of release and you can access your super benefits without retiring or satisfying another condition of release. For information on the special rules applicable to Australians aged 65 years or over, see SuperGuide section Turning 65 and super.
Note: More importantly, the age of 65 was the Age Pension age for Australian men and women, although Age Pension age has now increased to 65.5 years (since July 2017), and gradually increases to 67 years from 2023 (see SuperGuide articles Age Pension age increasing to 67 years and Age Pension age now 65.5 years (since July 2017) and Retirement Age Reckoner: Discover your preservation age and Age Pension age).
The Age Pension is still a very important part of retirement planning for most Australians because around 75 per cent of retired Australians of Age Pension age currently receive a FULL or PART Age Pension. Note that since 1 January 2017, the Age Pension assets test became much harsher for PART Age Pensioners (for more information on those Age Pension changes, see SuperGuide articles Age Pension: 300,000 Australians lost entitlements on 1 January 2017 and Retirementgate: Government’s Age Pension debacle hits middle Australia), and since January 2016, became harsher for retirees with defined benefit superannuation pensions (see SuperGuide article Age Pension income test change hits funded defined benefit pensions).
Consider taking a super pension (superannuation income stream)
Besides enjoying tax-free pension payment income in retirement, a compelling argument for starting a superannuation pension is that the earnings on assets financing your pension are exempt from tax (if the super pension is in retirement phase). You receive tax-free income, and your tax-free income is sourced from assets that are invested in a tax-exempt environment. In comparison, if you invest your savings outside the super environment, the earnings on your savings are potentially subject to income tax. For more information on how the super tax rules treat a super pension account’s investment earnings, see SuperGuide section Retirement phase (formerly called Pension phase).
The two main exceptions to tax-free superannuation benefit payments are:
- you are a member of an untaxed scheme receiving untaxed benefits (some public sector funds, and some tax may still apply), and
- since 1 July 2017, certain recipients of private and public defined benefit pensions (for information on how defined benefit pensions are treated under the new rules, see SuperGuide article Defined benefit pensions and the $1.6 million transfer balance cap).
Important: Since 1 July 2017, the assets financing a transition-to-retirement pension are no longer considered to be in retirement phase (which means 15% tax on investment earnings rather than no tax on earnings), although the tax concessions on benefit payments remain in place (for more information, see SuperGuide article Super pensions: Reviewing the merits of keeping a TRIP.
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.
Reminder: Taking effect since1 July 2017, the government has introduced a $1.6 million cap on the amount that can be transferred to pension phase (see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap).
Summary tables of super taxes for over-60s
For summary tables of super taxes on super benefit payments received by Australians aged 60 years or over, see SuperGuide article Super tax tables: When OVER 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.
Under-60s: If you’re seeking information on how super benefits are treated if you withdraw super BEFORE the age of 60, then see SuperGuide articles Super and tax tables: When UNDER 60 years of age, and Retiring before the age of 60: the tax deal and Retirement: 3 ways of taking super benefits before the age of 60.
Important: Different tax treatment also applies for individuals receiving death benefits from a super fund (see SuperGuide articles Superannuation death benefits: Who receives super payments, and how much tax is paid? and Superannuation after-life: Beware the dastardly death tax, and the cap). See other SuperGuide articles (by using the SuperGuide index, or using the search function) for more information on these topics, or refer to the Australian Taxation Office website.
What about the news reports that tax-free super should be removed?
The previous Liberal government (circa 2013), or more specifically, the former Prime Minister Tony Abbott, publicly stated that no changes to the superannuation tax system will happen — ever! In February 2015, the rumours began again that tax-free super for over-60s may be changed. The Liberals however drew a line in the political sand and declared that tax-free super for over-60s will remain indefinitely.
That was so yesterday. Now that we have a relatively new PM (Malcolm Turnbull) and relatively new treasurer (Scott Morrison), and a re-elected Coalition government (July 2016 and up for re-election in 2018 or 2019), anything is possible based on the recent super changes announced in the 2016 Federal Budget (for a summary of those changes, see SuperGuide article Latest superannuation changes: 2017/2018 guide), and plans by the ALP to tax super further.
The general message however that you can take from the Coalition government’s position on superannuation is that tax-free super benefit payments for over-60s will continue in the foreseeable future, although the Coalition has capped the amount of super that can enjoy tax-exempt earnings in retirement phase (see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap).
From the other side of the political fence, in late 2012, the former ALP government did fuel a rumour (started by themselves) that tax-free treatment of super benefits received by over-60s would be changed. The rumours fizzled out when the former ALP government realised that it would be political suicide to remove the tax-free status of retirement benefit payments, and for not much financial reward.
Good luck to the government that decides to win any future election by removing tax-free super for over-60s, or misleads the electorate into believing the government won’t change this rule, and then does change it after an election! Reminding the reader again that the Coalition has introduced a cap on the amount of super that can be transferred to pension phase (for information on this cap, see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap).
Background: The reason the former Liberal federal government introduced tax-free super in 2007 is that the then-treasurer Peter Costello realised, at the time, 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. Fast-forward to 2013, and the relatively new Liberal government, elected in September 2013 and restructured in September 2015, had promised ‘no changes to super’ during the first term of government, and more recently promised that there will be no changes to super taxes, ever. In May 2016, the new treasurer and new PM have backpeddled from this strong promise, and announced radical changes to the super system, which were confirmed with the Coalition being re-elected in the 2016 Federal Election, and these changes are now law (see SuperGuide article Latest superannuation changes: 2017/2018 guide).
Keep in mind that the Liberal treasurer, Scott Morrison, while he was Minister for Social Services, was responsible for the tough changes to the Age Pension rules which took effect from January 2017 (and changes affecting defined benefit pension members which took effect from January 2016). Arguably these tough Age Pension changes were simply changes to the super rules in reverse, since it dramatically affected the treatment of super benefits for part Age Pensioners (for more information on these Age Pension changes, see SuperGuide articles Age Pension: 300,000 Australians lost entitlements on 1 January 2017 and Retirementgate: Government’s Age Pension debacle hits middle Australia and Age Pension income test change hits funded defined benefit pensions).
In the foreseeable future, the super tax rules for over-60s remain in place. We explain how tax-free super benefit payments for over-60s operate earlier in this article, and see SuperGuide article Super tax tables: When OVER 60 years of age.