Taxation of your super – how it might affect you
Whether you pay tax (and how much you pay) will depend on which retirement product you choose for investing your super. It will also depend on your age and level of income. If you’re not clear about how you’ll be affected, it’s a good idea to consult a financial adviser or tax specialist.
When is tax payable?
Depending on your personal situation, there are two stages when tax might need to be paid on your super savings:
- Tax which your super provider pays on your earnings within the fund.
- Tax which you pay when you receive your superannuation benefits. This may be as an income stream, or as one or more lump sum withdrawals.
Paying tax within the fund
Once you’ve met a condition of release under government legislation*, you can convert your super to an income stream or withdraw lump sum amounts. Such conditions of release include reaching your preservation age and retiring; or turning 65 years of age.
Any earnings on your super savings are taxed at a maximum rate of 15%. Your fund pays this tax to the Australian Tax Office (ATO) for you.
Depending on your cash-flow requirements and product choice, you may choose to convert your super savings to one or more of the following income streams:
- Transition-To-Retirement (TTR) pension
You can set up a TTR pension once you reach your preservation age (whether or not you’re working). It can be a way to access some of your super and keep working – while reducing your working hours.- Any earnings on assets you hold in a TTR pension are still taxable at a maximum rate of 15%. Your fund pays this tax to the ATO for you.
- Your earnings will cease to be taxed within the fund once you turn 65. Earnings may also cease to be taxed before age 65 if you notify the fund that you have retired; have a terminal medical condition; or are permanently incapacitated.
- Account-based pension
This lets you take advantage of flexible income payments, while still being able to make lump sum withdrawals.- Your earnings on assets held in an account-based pension are not taxable within the fund.
- There are minimum annual amounts you must withdraw, depending on your age and account balance
- Annuity
This may pay you a guaranteed amount, for either a fixed term or the rest of your life. However, depending on the type of annuity product, lump sum withdrawals may be restricted, or carry a financial penalty.- Your earnings on assets held within a super annuity aren’t taxable, if you’ve met a condition of release and are receiving annuity income.
*Schedule 1, Superannuation Industry (Supervision) Regulations 1994
Paying tax on your superannuation benefit
You might need to pay tax on your super income stream or lump sum withdrawals you make. The amount of tax you pay will depend on a number of factors, including:
- the tax components of your super
- your age
- whether your benefit is a lump sum or a pension payment.
Tax components
Generally, your superannuation benefit will comprise both tax-free and taxable components. Your fund can tell you your tax components, but this is broadly how it works:
These are generally non-concessional contributions (e.g. personal contributions where no tax deduction is claimed, spouse contributions); and the 30 June 2007 value of some other after tax contributions you may have made before 1 July 2007. For more details, visit the ATO website.
- employer superannuation guarantee contributions
- salary sacrifice contributions
- personal contributions where you have claimed a tax deduction
- investment earnings on all your contributions.
Your taxable component may consist of a taxed or an untaxed element. It will depend on whether your superannuation benefit is paid from a taxed source (e.g. Colonial First State allocated pension) or untaxed source (e.g. public sector funds for Commonwealth, State and Territory government departments and most government super schemes); and/or whether your benefit includes any life insurance proceeds.
Your age makes a difference
60 or over
If you’re aged 60 or over, you usually won’t have to pay any tax on your super income stream or lump sum withdrawal.
Preservation age – under 60
If you’re under age 60 – but have reached your preservation age – only the taxable component of your income stream is taxable at your marginal tax rate2 .
However, you’re entitled to a 15% tax offset on this. And you don’t pay tax on the first $215,0003 of lump sum withdrawals.
Tax on your Colonial First State pension
Natalia is approaching retirement, and has reached her preservation age of 59. She has a super balance of $300,000.
Her balance includes $30,000 which she contributed as non-concessional (after-tax) contributions; with $270,000 made up of employer contributions and earnings.
This means that Natalia’s super will comprise a 10% tax-free component and a 90% taxable component.
How tax is applied
Natalia sets up an account-based pension through Colonial First State, and chooses to receive $10,000 in total income payments throughout the year. Of this amount, $1,000 (10%) will be tax-free, while $9,000 (90%) is taxable.
In Natalia’s case, 10% of each pension payment she receives will be tax-free. She may have to pay tax on the remaining 90% of each payment. Whether she does will depend on what other taxable income she receives, and her marginal tax rate (because she’s under 60).
A 15% tax offset entitlement
Because Natalia has already reached her preservation age, she’ll also receive a 15% tax offset ($1,350) to reduce any tax she does pay on the $9,000.
Once Natalia reaches age 60, she won’t have to pay tax on any of her account-based pension payments.
- Some tax may apply in limited circumstances if you have a taxable component that has an untaxed element.
- Different tax rates apply to a taxable component that has an untaxed element and pensions over $100,000 paid from capped defined benefit income streams.
- $215,000 is the ‘low rate cap’ for 2020-21 and is subject to indexation on 1 July each year.
SAPTO – another way to reduce your tax
If you’ve reached Age Pension age, you may be eligible for the Seniors And Pensioners Tax Offset (SAPTO). Under this government scheme, you can reduce the amount of tax you’re liable to pay.
This could be helpful if you’re earning income from part-time work or investments.
Depending on your circumstances, your Age Pension might also be taxable, and SAPTO might reduce the amount you need to pay.
You’ll need to be at least age 66, and meet various eligibility requirements. In some cases, your tax payable may be reduced to zero, with no obligation to lodge an annual tax return.
Find out more about SAPTO eligibility requirements.
Make informed decisions
You’ll find plenty of detailed information for seniors and retirees at the Australian Taxation Office website. However, taxation can be a complex area – so it’s a good idea to consult a financial adviser or tax specialist.
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Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) is the trustee of the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and issuer of FirstChoice range of super and pension products. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the responsible entity and issuer of products made available under FirstChoice Investments and FirstChoice Wholesale Investments.
Information on this webpage is provided by AIL and CFSIL. It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the target market determinations (TMD) for our financial products at https://www.cfs.com.au/tmd which include a description of who a financial product might suit. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. You can get the PDS and FSG at www.cfs.com.au or by calling us on 13 13 36.