(2) How much tax will I pay when I get hold of my superannuation?

how much do i get taxed

Warning

This webpage covers a very complex topic in a simplified way, which means that it only covers the main points and it does not cover every rule. So be aware that sometimes the simplified explanation on this page will not cover your particular financial situation. Please read our disclaimer before you use any information on this website.

In short, this depends on your age-whether you are under 60 or over 60.

If you are 60 or over, then in most circumstances you will not pay any tax.

If you are 59 or under then you will probably pay some tax.

  • But be aware that if you die, then the rules are different when the money goes to your beneficiaries. For example, if you are over 60 and enjoying a tax-free pension, this does not mean that, if you were to pass away, your children would inherit your superannuation tax-free.
  • To give you a more precise answer, however, we need to look at:

    whether we are talking about a lump sum or a pension.

  • what the tax-free and taxable components of your superannuation are, and
  • your age (under 55, 55-59, 60 or over).
  • For ease of navigation, the rest of this page is divided into the following sections:

    • If you are under 55
    • If you are 55-59
    • If you are 60 or over

    If you are under 55

    If you are under 55, then you cannot normally access your superannuation by the standard means of retirement from the workforce. However, in some circumstances such as permanent disability, you can access your superannuation before age 55. See topic (1) for more information.

    Lump Sums

    On a lump sum withdrawal, there is:

    • no tax on the tax-free component ,
    • and 21.5% tax (incl. 1.5% Medicare levy) on the taxable componenent (element taxed) .

    For example, if some of your super is unrestricted non-preserved. then you can withdraw that portion of your super at any time. However, while you can choose to withdraw that part of your super which is unrestricted non-preserved but leave any super which is preserved or restricted non-preserved. the rules in relation to the tax components are different. You cannot pick and choose the tax components; instead, they are calculated using a proportional rule.

    Suppose you have $300,000 of super and $100,000 is unrestricted non-preserved. Furthermore, 20% of your superannuation is the tax-free component and the other 80% is the taxable component (element taxed). If you elected to withdraw all $100,000 of your super which is unrestricted non-preserved. then for tax purposes, the proportional rule would apply. So $20,000 of the lump sum would be the tax-free component (i.e. 20%) and $80,000 (i.e. 80%) would be the taxable component (element taxed). This means you would have to pay 21.5% tax (incl. 1.5% Medicare levy) on the $80,000 which works out to be $17,200.

    In rarer cases, you may have a taxable component (element untaxed) instead of a taxable component (element taxed). If this is the case, then you will pay 31.5% tax (incl. 1.5% Medicare levy) on this component. Finally, be aware that if the amount of your taxable component (element untaxed) withdrawn as lump sums exceeds $1.1m in your lifetime, then the rate on the amount above $1.1m jumps from 31.5% to 46.5% (incl. 1.5% Medicare levy).

    Pensions

    On a pension, there is:

    • no tax on the tax-free component ,
    • but the taxable component (element taxed) goes onto your tax return and is taxed at marginal tax rates (and the 1.5% Medicare levy also applies).

    Before you start a pension, your superannuation will be made up of the tax-free component and the taxable component (element taxed) in a particular proportion (e.g. 10% and 90% respectively). The proportion (or ratio) immediately before you start the pension is the proportion that will apply for the life of the pension. In other words, the proportion is struck at the beginning and does not change. A good adviser will be aware of this fact and may use this knowledge in recommending a financial plan.

    For example, suppose you commence a pension paying $20,000 each year where 10% is the tax-free component and 90% is the taxable component (element taxed). When lodging your tax return, $2,000 (or 10%) will not be counted, although the other $18,000 (or 90%) will count. Suppose you have other income, so $10,000 is taxed at the 15% marginal tax rate while the remaining $8,000 is taxed at the higher 30% tax rate. Tax of $1,500 would apply to the first $10,000 and tax of $2,400 would apply to the remaining $8,000 yielding a total of $3,900. The 1.5% Medicare levy would also apply to the whole $18,000 adding a further $270. So when the Medicare levy is included, total tax of $4,170 would be payable on the $20,000 pension.

    As mentioned before, permanent disability is one rule which allows you to access your superannuation before age 55 (as the standard rule of retirement from the workforce does not apply until at least age 55). Obviously it is unfortunate for anybody to be permanently disabled, however, if a person is permanently disabled, a 15% tax offset applies in relation to the pension. In the above example, the amount of tax payable on the $20,000 pension was $4,170. If the person was permanently disabled, then a 15% tax offset would apply to the $18,000 taxable component (element taxed). which works out to be $2,700. In this case, the amount of tax payable would reduce from $4,170 to $1,470 (which is a substantial change).

    Finally, in rare cases, some people will have a taxable component (element untaxed) instead of a taxable component (element taxed). In these cases, no 15% tax offset applies if you are permanently disabled, but otherwise, the rules are the same. So using the above example of a $20,000 pension, tax of $4,170 would apply if we were talking about the taxable component (element untaxed). regardless of whether or not you are permanently disabled.

    If you are 55-59

    In this age bracket, you would usually only have access to your superannuation if you have retired from the workforce or if you are using a special type of pension known as a transition-to-retirement pension or TTR pension. Importantly, a transition-to-retirement pension does not allow lump sums. See topic (1) for more information on the rules for accessing your super.

    Lump Sums

    The tax rules on lump sum withdrawals are as follows:

    • There is no tax on the tax-free component .
    • On the taxable component (element taxed) a lifetime cap applies (i.e. the amount withdrawn each financial year is remembered and added to the total). On the first $150,000 there is no tax, but on any amount above that there is 16.5% tax (incl. 1.5% Medicare levy).
    • In rare cases, if you have the taxable component (element untaxed). then a lifetime cap applies (i.e. the amount withdrawn each financial year is remembered and added to the total). On the first $150,000 the tax rate is 16.5% (incl. 1.5% Medicare levy). On any amount above this (up to $1.1m), the tax rate is 31.5% (incl. 1.5% Medicare levy). Finally, if you were to exceed $1.1m, then the tax rate increases to 46.5% (incl. 1.5% Medicare levy).

    For example, suppose you had withdrawn $140,000 against the lifetime cap in previous financial years in relation to the taxable component (element taxed). This financial year you withdraw a lump sum of $20,000 where 70% is the taxable component (element taxed) and the other 30% is the tax-free component. Of this $20,000 lump sum, 70% or $14,000 will be counted as the taxable component (element taxed). This will bring your lifetime cap up to $154,000. Consequently, $4,000

    will be taxed at 16.5% (incl. 1.5% Medicare levy), so you will have to pay tax of $660.

    Note: When you withdraw a lump sum, the proportional rule applies so you cannot choose which tax components to withdraw. If 70% of your super is the taxable component (element taxed) and the other 30% is the tax-free component. then your lump sum must be made up in the same proportion.

    Pensions

    On a pension, there is:

    • no tax on the tax-free component ,
    • but the taxable component (element taxed) goes onto your tax return and is taxed at marginal tax rates (incl. 1.5% Medicare levy), less a 15% tax offset.

    Before you start a pension, your superannuation will be made up of the tax-free component and the taxable component (element taxed) in a particular proportion (e.g. 10% and 90% respectively). The proportion (or ratio) immediately before you start the pension is the proportion that will apply for the life of the pension. In other words, the proportion is struck at the beginning and does not change. A good adviser will be aware of this fact and may use this knowledge in recommending a financial plan.

    For example, suppose you commence a pension paying $20,000 each year where 10% is the tax-free component and 90% is the taxable component (element taxed). When lodging your tax return, $2,000 (or 10%) will not be counted, although the other $18,000 (or 90%) will count. Suppose you have other income, so $10,000 is taxed at the 15% marginal tax rate while the remaining $8,000 is taxed at the higher 30% tax rate. In actual fact, the first $10,000 will be taxed at 1.5% (15% tax plus the 1.5% Medicare levy minus the 15% tax offset). This will result in tax of $150. The remaining $8,000 will then be taxed at 16.5% (30% tax plus the 1.5% Medicare levy minus the 15% tax offset). This will result in tax of $1,320. Adding together the $150 and the $1,320 then the total amount of tax payable on the $20,000 pension is $1,470.

    Finally, in rare cases, some people will have a taxable component (element untaxed) instead of a taxable component (element taxed). In these cases, no 15% tax offset applies, but otherwise, the rules are the same. So using the above example of a $20,000 pension, the first $10,000 would be taxed at 16.5% (15% tax plus the 1.5% Medicare levy). This will result in tax of $1,650. The remaining $8,000 will then be taxed at 31.5% (30% tax plus the 1.5% Medicare levy). This will result in tax of $2,520. Adding together the $1,650 and the $2,520 gives a total tax bill, on the $20,000 pension, of $4,170.

    If you are 60 or over

    The good news is that you will not pay any tax on lump sums or pension payments, unless some of your super is the taxable component (element untaxed).

    However, if you are aged 60-64, you should also be aware that you cannot normally access your super if you continue to work for the same employer. You usually need to stop working with your current employer (i.e. change jobs) or retire from the workforce altogether. But when you reach age 65, this is no longer a problem and all of your super is accessible, regardless of your circumstances. See topic (1) for more information.

    Lump Sums

    On a lump sum withdrawal, there is:

    • no tax on the tax-free component. and
    • no tax on the taxable component (element taxed) .

    This means that for most people, there is no tax. In fact, the lump sum received does not need to be recorded on your tax return, which consequently means that some people no longer need to lodge a tax return.

    However, if you have super which contains the taxable component (element untaxed). then a lifetime cap applies (i.e. the amount withdrawn each year is remembered and added to the total). On the first $1.1m, the tax rate is 16.5% (incl. 1.5% Medicare levy), while any amount over $1.1m is taxed at 46.5% (incl. 1.5% Medicare levy). For example, if you withdrew a lump sum of $50,000 where 80% was the taxable component (element untaxed). then $40,000 would be subject to tax of 16.5% (provided that the total amount of the taxable component (element untaxed) withdrawn in your lifetime does not exceed $1.1m). Calculating 16.5% of $40,000 gives $6,600 and this is the amount of tax which would be payable on the $50,000 lump sum.

    Note: When you withdraw a lump sum, the proportional rule applies so you cannot choose which tax components to withdraw. If 80% of your super is the taxable component (element untaxed) and the other 20% is the tax-free component then your lump sum must be made up in the same proportion.

    Pensions

    On a pension, there is:

    • no tax on the tax-free component. and
    • no tax on the taxable component (element taxed) .

    This means that most people over age 60 will not pay any tax on their pensions. In fact, the pension received does not need to be recorded on your tax return, which consequently means that some people no longer need to lodge a tax return.

    But be warned that just because you are enjoying a tax-free pension, this does not mean that your superannuation will be inherited tax-free by your beneficiaries if you were to pass away. If your super is inherited by your spouse, then no tax applies. But if your super is inherited by your adult children, then in nearly all cases, tax will apply. On the taxable component (element taxed). a rate of 16.5% (incl. 1.5% Medicare levy) will apply. On the taxable component (element untaxed). a rate of 31.5% (incl. 1.5% Medicary levy) will apply. Even if your super goes to your estate and your adult children inherit via your estate, the same taxes will apply (although for various reasons the Medicare levy is avoided so you save 1.5% if your super goes through your estate first).

    Finally, in rare cases, some people will have a taxable component (element untaxed) instead of a taxable component (element taxed). In these cases, the taxable component (element untaxed) will be taxed at marginal tax rates less a 10% tax offset. Suppose you are single and draw a modest pension of $30,000 in the financial year. If we assume that 80% of your super is the taxable component (element untaxed). then $24,000 (or 80%) will be counted as income on your tax return. If your only other income is some bank interest (e.g. less than $5,000), then your marginal tax rate will not exceed 15%. Once the 10% tax offset is taken into account, the net result is 5% tax. Furthermore, other tax offsets such as the Senior Australian Tax Offset (SATO) could apply, so you might not pay any tax at all, in the end. However, if you have a lot of income, you might have a top marginal tax rate of 31.5% (incl. 1.5% Medicare levy) or more. From the earlier example, if we assume that the $24,000 of the taxable component (element untaxed) would all be taxed at 31.5% (incl. 1.5% Medicare levy), then after taking off the 10% tax offset, the tax rate reduces to 21.5%. Calculating 21.5% of $24,000 gives $5,160 and this is the amount of tax that would be payable on the $30,000 pension.

    We emphasise that tax calculations can be very tricky in practice and only the main points have been discussed on this page. As the tax laws are very complex, you need to be aware that many other factors can affect how much tax you will pay, in your particular circumstances. Therefore, professional tax advice is often required. Please call us on (03) 9875 4300 if you would like to discuss your situation.

    Source: www.moneyguidance.com.au

    Category: Taxes

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