Taxation in superannuation is a complex subject and the information provided in this article is broad and of a general nature.
On retirement, superannuation can be taken as a lump sum payment, income stream (you regular payments) or both.
The amount of tax (if any) if you have to pay is depending 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 benefit taken as an income stream. For information about the tax treatment on a lump sum, see the article What is the tax treatment of a superannuation benefit taken as a lump sum?
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component before putting it in superannuation, you do not have to pay tax again, regardless of your age, the amount withdrawn and whether you’re taking it as a lump sum or income stream.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 when you take the benefit as an income stream. See below for further explanation.
How does your age impact superannuation tax?
60 and over – if you’re 60 years old or older, you do not have to pay any tax on benefit taken either as an income stream or a lump sum from either a Tax-free or Taxable component element tax.
Between preservation age and 59 (current preservation age 55-59) – if you receive an income stream payment, the Tax free component will not be taxed. The amount from the Taxable component – element tax will be taxed as an income at your marginal tax rate, plus medical levy. However, you will receive a tax-offset of 15% on the amount in Taxable component. Depends on your marginal tax rate, this may reduce your tax to nil.
Under 55: Generally, you cannot access your superannuation if you’re under the age of 55, except where you are permanently disabled, and if this is the case, you’ll be taxed as if you’re between 55 and 59.
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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