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- 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
- Tax free or taxable? Understanding the different components
- What is the low-rate threshold or cap?
- What are the tax implications of withdrawing at different ages?
- Withdrawing from an untaxed defined benefit fund: Tax implications
- Withdrawals by 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 favourite activities.
Before you turn the dream into reality, it’s important to understand the tax implications.
So, just what are the taxes that could apply if you decide to withdraw your super before you turn 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 withdraw them before you reach your preservation age.
You need to speak to your super fund to apply for access before reaching your preservation age.
Once you reach 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.
Withdrawing your super
When you meet a condition of release and apply to access your super benefit, you can generally choose to withdraw from your super as an income stream, lump sum or a combination of the two:
- 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. If you take a lump sum the money is no longer within the super system and if you invest it, any return on your investment will be taxed like normal income, not super. This means the concessional tax rate of 15% on your super account’s earnings will no longer apply. Instead the earnings will be taxed at your marginal tax rate, which can be as high as 45% (plus the Medicare levy).
Accessing super before age 60: Terms you need to know
When you withdraw your super benefits before age 60, you need to learn some new jargon. Although the terms sound pretty boring, each factor helps determine how much – if any – tax you will pay.
To work out how your super benefit will be taxed, you need to know:
- Your preservation age
- Whether you plan to take a lump sum or an income stream
- Your tax-free and taxable components
- The current low-rate threshold or cap.
Tax free or taxable? Understanding the different components
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 your concessional (before-tax) contributions. These include employer contributions (such as Super Guarantee contributions), salary-sacrifice contributions and any super contributions for which you claimed a tax deduction.
This taxable component is further divided into taxed and untaxed elements:
- In most cases, your super fund will have paid the 15% contributions tax imposed on your taxable component. This part of your super benefit is called the taxed element of your taxable component (taxable component – taxed element).
- If your super fund has not paid tax on any part of your taxable component, those amounts are called the untaxed element of your taxable component (taxable component – untaxed element).
Your annual statement from your super fund will normally indicate both the tax-free and taxable components of your super account. If not, contact your fund and they will be able to work it out for you.
What is the low-rate threshold or cap?
When you withdraw your super benefits as a lump sum before you reach age 60, you can take a set amount of your benefit tax free. This amount is indexed each year and is called the low-rate threshold or cap.
The low-rate cap is the limit on the amount of taxable components (both taxed and untaxed elements) of a lump sum that can receive a lower (or nil) rate of tax. It applies to people who have reached their preservation age but are still aged under 60.
In 2021–22, the low-rate cap is $225,000.
The low-rate cap is a lifetime limit, which means it is the total amount you can take at a lower rate of tax over your lifetime, even if you make several withdrawals. Any amount over the low-rate threshold is taxed at 17% (including the Medicare levy) or your marginal tax rate, whichever is lower.
What are the tax implications of withdrawing at different ages?
1. Under your preservation age
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:
Withdrawal UNDER your preservation age
|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 box below)|
Note: Other tax rates may apply if you access your super due to a terminal medical condition, permanent incapacity, you are a temporary resident leaving Australia permanently, or if it is a super death benefit.
Source: ATO website.
2. Over your preservation age but under 60
If you withdraw some of your super benefit under age 60 but after your preservation age (55 to 59 depending on your date of birth), you will pay tax on some elements whether you take the money 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 is taxed as follows:
Withdrawal OVER your preservation age but UNDER age 60
|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 ($1.615 million in 2021–22). In this case the amount above the cap is taxed at the top marginal rate|
* Low-rate cap is $225,000 in 2021–22.
Source: ATO website
Withdrawing from an untaxed defined benefit fund: Tax implications
Defined benefit super funds are usually large corporate or government employer super funds and the tax rules for 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 or constitutionally protected fund (CPF), which are mainly public sector schemes such as West State Super or Triple S Fund in South Australia.
The majority of super funds are taxed super funds, meaning the fund has paid tax on behalf of their members. Untaxed funds or CPFs, however, do not pay tax on contributions or earnings and defer paying the tax until the member leaves the fund.
The following tax rates apply when withdrawing benefits from an untaxed super fund or constitutionally protected funds:
Withdrawal UNDER your preservation age
- No tax payable on the tax-free component of either a lump sum or income stream payments.
- 22% tax payable on the taxable component – taxed element of a lump sum
- 30% tax plus Medicare levy payable on the taxable component – untaxed element of a lump sum up to the untaxed plan cap ($1.615 million for 2021–22) and 45% plus Medicare levy over the cap
Withdrawal OVER your preservation age but UNDER age 60
- No tax payable on the tax-free component of either a lump sum or income stream payment
- 0% up to the low-rate cap of $225,000 (2021–22) and 15% plus Medicare levy on the balance of the taxable component – taxed element.
- 15% tax plus Medicare levy payable on the taxable component – untaxed element of a lump sum up to the low-rate cap of $225,000 (2021–22), and 30% plus Medicare levy on the amount over the low-rate cap but under the untaxed plan cap of $1.615 million (2021–22). Rate of 45% plus Medicare levy for any amount over the untaxed plan cap.
Withdrawals by 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.
Tax time: Filling in your tax return
When tax time rolls around, you need to include details of your benefit payment in your annual tax return:
1. Under preservation age
If you are under your 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 your super benefit and any tax offsets on the taxed element of your benefit.
To complete your tax return, you need to include the taxable component of your super benefit with your assessable 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 you 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.