How is my income from super taxed?

Super benefits breakdown

Super benefits have two components: a tax-free component and a taxable component. Whether super benefits are taxed depends in large part on your age:

If you are retired and aged 60 or above:

The majority of retirees aged 60 and above who choose to access their super benefits, whether as a lump sum or by way of an income stream, will do so tax-free.

A few, who may have been public servants for all or part of their working lives, will owe tax because all or a portion of the taxable component of their benefits package contained an untaxed element on which tax still needs to be collected.

How these recipients will be taxed depends on how they chose to receive their super benefits payments:

  • Those who opted for a lump sum will see any amount up to the untaxed plan cap amount for the financial year – the cap is indexed every February. Any amount above the cap would be taxed at a higher rate, including the Medicare levy.
  • Those who picked an income stream would be taxed at marginal rates, with a 10% tax offset.
If you are at or above preservation age but under 60:

Super payees who have reached preservation age but are under the 60-year cap and chose to receive the payment as a lump sum would not be required to pay any tax unless the amount of the payment was above the low rate cap amount.

The low rate cap threshold is indexed every year. For the 2015-2016 term, it is set at $195,000.

Lump sum super payments above this amount will be taxed at a rate of 17%.

However, any portion of their total payment that contained an untaxed element would be taxed at 31.5% and any part of this untaxed segment that fell above the untaxed plan cap amount would see tax withheld at the maximum rate of 46.5%. Those who opted for a pension instead of a lump sum would see their super payments taxed at marginal rates with the possibility of getting a 15% tax offset. However, if some part of their super was made up of an untaxed element that portion would also be taxed at marginal rates but without the option of a tax offset.

If you have not reached preservation age:

The age at which you reach the so-called preservation age for super purposes has been gradually creeping up. If you were born before July 1960 it is 55, but for those born after July 1 of 1964, the preservation age is 60.

This means that you will have to have reached that age to start accessing your super benefits. Under preservation rules, super funds can be withdrawn before the preservation age only by meeting strenuous conditions of release such as a permanent disability.

In the rare or unfortunate case where early access to super is necessary and made available, the recipient should be prepared for a measure of tax sticker shock. As such, the whole amount of the already tax elements would be subject to a maximum rate of 21.5% on lump sum payments while any untaxed portion would suffer rates of 31.5 to 46.5% depending on whether the amount fell above or below the untaxed plan cap amount.

 

Read more here for the breakdown of super benefits.

How are my super payments reported?

PAYG Payment Summary

If you reached preservation age, have retired, and opted to take money out of your super fund, you will or should have received a PAYG payment summary from your superannuation payer. The payment summary will indicate how you chose to claim your payments, whether as a lump sum or as an income stream.

 

Lump Sum
If you took your payment as a lump sum, the payment summary will list the taxable component of the payment you received in terms of its taxed and untaxed elements. If you are under 60 amounts in the taxable component section of the PAYG are reported as assessable income.

It will also show the amount of any tax withheld by your fund. If a tax was withheld you will need to lodge a tax return. This will ensure that the ATO credits you for the withheld amount and enable you to reduce your tax liability.

 

Pension
If you opted for a pension instead, your PAYG summary will also list any tax withheld, along with any taxable component amounts. In addition, it will show the amount of any tax offset you received. All need to be included on your income tax return.

Both payment summaries will also show the amount of your payment that is a tax-free component. You are not required to show that amount in any part of your tax return.

Read our tax blog for more details.

Are payments from my superfund always taxed as income?

If super payments from a superannuation fund were made to you or not, it needs to be reported as assessable and therefore taxable income will depend on three key factors:

  1. Your age
  2. Your retirement status, if you are under 65 of age
  3. The portion of your benefit that is subject to a tax that does not contain an untaxed element.

 

If you are 60 or older:

If you are 60 or older and have retired the benefits you claim from super are not subject to tax provided that the portion that is not tax-free has already been fully taxed. This applies whether you choose to receive your benefits as a lump sum or in the form of a pension or income stream.

If you’re aged 65 or over, you don’t have to have retired to access your super but, again, any benefits that issued from an untaxed source would still be subject to tax.

 

Preservation Age:

If you’ve reached preservation age (currently 55 if you were born before July 1960) but are under 60, payments you received from your super fund would be taxed as income at varying rates depending on whether they issued from taxed or untaxed funds.

Most people have their super accounts in fully taxed funds, meaning their benefits would be tax-free if they had retired and/or were of the right age.

Some super funds, however, such as a number of older public sector and government funds, did not pay the contributions and earnings tax from concessional contributions. Benefits received from these untaxed funds are accordingly subject to higher tax rates than those paid by the vast majority of large super funds. If your super was largely composed of funds from such untaxed sources it is very likely that you’d end up owing tax even while you met the age and retirement stipulations.

How are disability benefit payments taxed?

Disability Benefit Payments

Firstly, disability benefit payments are payments you receive from either your super fund or your employer as a lump sum or an income stream when you suffer from a physical or mental illness that prevents you from working.

 

However, this income is still taxable and you have to pay careful attention to the different parts of your payments to find out what you owe on each one. There are two types of payment components.

 

  1. Tax-Free
    You don’t owe anything on the tax-free component. It’s not assessable and you don’t have to include it on your return.
  2. Taxable 
    The taxable component is divided into a taxed and an untaxed element. The taxed element may have some tax paid on it. Depending on your age, you may owe even more. The untaxed element hasn’t had anything paid on it. You will definitely need to pay tax on it.

What is CentreLink?

Centrelink

Centrelink is a program in the Department of Human Services that delivers a range of payments and services for retirees, the unemployed, families, carers, parents, people with disabilities, Indigenous Australians, and people from diverse cultural and linguistic backgrounds. Additionally, it provides services at times of major change.

 

Most government payments are assessable for income tax purposes and must be declared on your tax return. However, other government pensions, allowances, and payments are exempt from income tax.

 

E-Lodge supports the following Centrelink services.
  • Age Pension
  • Bereavement Allowance
  • Career Payment
  • Disability Support Pension
  • Education Entry Payment
  • Parenting Payment
  • Widow B Pension
  • Income support supplements