The SuperLiving guide to super tax
Tuesday, 27 July 2010 James McGrath
CHANCES are that when you get your final super payout, you’re going to be scratching your head as to why so much tax has been taken out. We at SuperLiving have put together a blow-by-blow account of how your super will be taxed so that it won’t be such a shock when the taxman comes knocking at your door come retirement time.
Tax-free and taxable components
The first thing we have to know is that there are two key components of a super payout: the tax-free component and the taxable component.
A tax-free component is just that. It’s part of a benefit and does not count towards your taxable income.
The taxable component is the part of the benefit which can be taxed. Now, the taxable component is again split into two different elements. Clear as mud so far?
A taxed element is the part of your fund that has already been taxed, but still needs to be included on your tax return more often than not as assessable income.
The untaxed element needs to be included in your tax income as assessable income. You can find out whether your payout will be made up of an untaxed element, taxed element or both by getting in touch with your super manager, or it could be included on your super statement.
Exactly how the taxed and untaxed elements are taxed when it comes to your super payout depend on a number of variables.
Do I need to pay additional tax on the taxed element of my super?
In some cases, you do not need to pay additional tax on what you’ve already been taxed on.
If you’re over 60, this is definitely the case. Whether you choose to get your payout in a lump sum or as a pension, no tax will be paid on your taxed element.
If you’re between your preservation age (a table can be found here) and 60 and receive a lump sum on your taxed element, you’ll need to include it in your assessable income on the first year you get the payment.
From here, the income is taxed at 15% plus Medicare levy.
The good news is that there is a low rate cap amount which is indexed annually, and you don’t have to pay tax on this amount.
For example, if I was between the preservation age and 60 and received $340,000 in a lump sum, I wouldn’t pay any tax on $150,000 (the current low rate cap) of that amount and pay 15% tax plus the Medicare levy on the remaining $190,000.
If you’re between your preservation age and 60 and choose to receive your income as a pension, you will pay tax at the marginal tax rates.
The happy news is that you’ll receive a tax offset to the tune of 15%. So if I was between the preservation age and 60 and I got a taxed element payout on $30,000 per year, the tax I would have to pay would be reduced by $4500 per year.
If you’re below your preservation age and choose to receive your payout as a regular income stream, you’ll have to pay your marginal tax rate plus the Medicare levy each year on the income.
The calculations then are simpler, but just that little bit more depressing.
If you’re below preservation age and choose a lump sum payment, the upswing is that you’ll receive a tax offset to ensure that you’ll pay no more than 20% plus the Medicare levy on your lump sum.
How about the untaxed element of my super?
If you’re over 60 and you receive an income stream payout, and it’s an untaxed element, you’ll have to pay your marginal tax rate plus the Medicare levy on your income.
The plus side is that you’ll get a 10% offset, so the amount of tax you’ll have to pay on a $30,000 per year untaxed element income stream is reduced by $3000.
If you’re over 60 and choose to receive your untaxed element as a lump sum, you’ll pay no more than 15% plus the Medicare levy on the amount, but if your lump sum is more than $1.1 million you’ll pay the marginal tax rate on any amount above that.
If you’re between your preservation age and 60 and you get your pay out as an income stream, if it’s an untaxed element you’ll be required to pay tax at the marginal tax rate plus the Medicare levy.
The good news is that when you turn 60, you’ll get a 10% offset on the tax.
If the same scenario applies and you choose to receive your payment as a lump sum instead of an income stream, the calculations are a little bit trickier.
You are taxed no more than 15% and the Medicare levy up to the low rate cap amount (currently $150,000).
Then, the remainder of the payment is taxed at no more than 30% and the Medicare levy.
If your amount is above $1.1 million, you’ll pay the highest marginal tax rate plus the Medicare levy on the remaining amount above that figure.
If you’re under the preservation age and you receive your payment in an income stream, you’ll have to pay your marginal tax rate plus the Medicare levy.
If you receive it as a lump sum then you’ll pay no more than 30% plus the Medicare levy.
Mixing and matching
If all that wasn’t complicated enough, what happens when you’re paid out under different elements?
For example, what if you were between your preservation age and 60 and received your part of your payment as an untaxed lump sum, part of your payment as a tax-free component and part of your payment as a taxed income stream?
Well, it’s about taking each separate element and applying the rules to them. Below is an
example of how you would go about it.
Bob was born in August of 1960 and he will retire in September of 2018. His fund will pay out a tax-free component of $100,000, a lump sum of $200,000 untaxed and a taxed element of $420,000 to be paid out at $35,000 per year.
The first thing we would do is work out if Bob is at the preservation age. He will be 58 when he retires, which is between the preservation age and 60.
His tax-free component is his, no tax required.
His $200,000 untaxed lump sum would be taxed accordingly. He would pay no more than 15% tax plus the Medicare levy on the first $150,000 (the low rate cap amount), and no more than 30% plus the Medicare levy on the remaining amount.
His regular income stream of $35,000 is to be paid out of a taxed element of $420,000. He would pay tax on the $35,000 per year at marginal tax rates plus Medicare levy, but receive a 15% tax offset.
On the first tax return, he would report on the lump sum and income stream as assessable income, and in the second tax return he would report just the income stream.
We hope this proves to be a handy guide to taxing superannuation that you may take into consideration when making your retirement plans.
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