Taxation in superannuation is a complex subject and the information provided in this article is broad and of a general nature only.
On retirement, superannuation can be taken as a lump sum payment, income stream (you receive regular payments) or both.
The amount of tax (if any) you have to pay is dependent on many factors – your age, benefit components and how you receive the benefits (as a lump sum or income stream).
This article looks at the tax treatment of super benefits taken as a lump sum. For information about the tax treatment on benefits taken as an income stream, see the article What is the tax treatment of a superannuation benefit taken as an income stream?
Note that you do not have to pay any tax when you rollover (transfer) your superannuation between super funds, unless you belong to a public sector defined benefit scheme and there is an amount in the Element untaxed component. This component is subject to 15% contributions tax upon rollover to another fund.
Let’s look at factors that have an impact on tax:
Superannuation benefit components
The total amount in your account balance is usually held in one or two main components for tax purposes. These are Tax-free and Taxable components. The Taxable component is split into two sub components – Element taxed and Element untaxed. If you belong to a public sector scheme (defined benefit fund), you may have Element untaxed amount which is the amount that has not had the contributions tax deducted from it.
For an accumulation fund (the majority of people belong in this fund), the benefit will be in the Taxable component – element taxed. You shouldn’t have any amount in Element untaxed.
Check your statements to see your benefit components.
Tax-free component – This component is made up of non-concessional contributions, which are the contributions made from after-tax money. This generally includes personal contributions, co-contributions and spouse contributions. If you receive a refund of the contributions tax from the ATO because you’re a low income earner, the amount will also goes into the Tax-free component.
As you have already paid income tax on the amount in the Tax free component before putting it in superannuation, you do not have to pay tax again, regardless of your age, the amount withdrawn and whether you’re taking it as a lump sum or income stream.
Taxable component (element taxed) – this component comes from concessional contributions made by your employer such as the 9% superannuation guarantee and salary sacrifice. If you make a personal contribution and you claim it as a tax deduction, the contribution is also classified as a concessional contribution.
You may or may not have to pay tax on Taxable component – Element taxed, depending on many factors. See details below:
What is a superannuation lump sum threshold?
A lump sum withdrawal threshold is the maximum superannuation benefit a person can receive as a lump sum in their lifetime (not on each withdrawal) without having to pay tax. The threshold increases annually and for 2012/13 financial year, the amount is $175,000. The lump sum threshold only applies to a person who is aged between their preservation age and 59, receiving a lump sum amount from the Taxable component. To find out what your preservation age is, see the article Condition of release: when can you access your superannuation?
How does your age impact superannuation tax?
Age 60 and over – if you’re 60 years old or older, you do not have to pay any withdrawal tax regardless whether you take it as a lump sum or income stream.
Between preservation age and 59 (current preservation age 55-59) – if you withdraw your superannuation between these ages, the first $175,000 (2012/13 financial year) from the Taxable component is not taxed. The amount above this threshold is taxed at 16.5%. Any amount paid from the Tax-free component is not taxed.
Under 55: Generally, you cannot access your superannuation if you’re under the age of 55, except where you are eligible for an early release under severe financial hardship or compassionate grounds. If you’re eligible, you’ll pay a hefty tax of 21.5% on the Taxable component. Any amount paid from the Tax-free component is not taxed.
Death benefit tax
Tax on a death benefit paying out as a lump sum depends on whether the recipient is a dependant or non-dependant of the deceased.
If the recipient is a dependant of the deceased, no tax is payable on the lump sum amount. However, if the recipient is a non-dependant, 15% tax will apply to the lump sum. No tax is payable from the Tax free component.
A dependant is defined as:
- The spouse or de facto spouse of the deceased (including same sex);
- The child of the deceased under the age of 18;
- The personal financially dependent on the deceased at the time of death;
- The person had an interdependency relationship with the deceased just before death.
Benefit payment under $200 (any age)
If you terminate employment with the employer who made SG contributions to your super fund and the account balance is under $200, you can access this amount now without paying any tax.
Terminal Illness Benefit
A lump sum payment under terminal medical condition is not subject to tax.
Departing Australia Superannuation Payments
Foreigners working in Australia under an eligible temporary working visa are entitled to access their superannuation when they leave. The Taxable component – Element taxed is taxed at 35% and Element untaxed 45%.
The information contained in this article is broad and of a general nature. We have not taken your circumstances into consideration. For a specific advice applicable to your situation, we recommend that you see a financial planner.
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