Superannuation and tax – withdrawals
The amount of tax you pay on withdrawing your super (if any), depends on a number of factors.
Here we explain tax on withdrawals from ‘taxed’ super funds (commonly referred to as account based funds) and ‘untaxed’ super funds also referred to as defined benefit funds.
The tax exempt component comprises all non-concessional contributions, the Capital Gains Tax (CGT) exempt component and components previously known as the Pre 1 July 1983 component, the Post 30 June 1994 invalidity component and the Pre 1 July 1994 Concessional component (note: the last three components are rare).
The taxable component is made up of everything that is not in the tax exempt component. Included in this component are all concessional contributions, the components previously known as the Post 30 June 1983 component and the non-qualifying component as well as earnings on all the components of the fund.
| Age of member at time of withdrawal | Tax Exempt/Free Component | Taxable Component |
|---|---|---|
| 60 or over | Tax free | Tax free |
| Between preservation age and 60 | Tax free |
|
| Under preservation age | Tax free | Up to 20% plus Medicare levy |
- Payments to superannuants aged 60 or more are exempt income and so are free from income tax.
- Payments to superannuants under 60 are taxable less a deductible amount, representing the proportion of their tax exempt component. An income tax offset of 15% applies to the taxable component of the income
- Taxation of payments to a reversionary recipient is dependent on the age of the superannuant and the reversionary recipient at the time of death - (see Tax on death benefit payments below)
- Payments to non-dependants or to the estate are made as a lump sum and tax at the rate of 15% plus Medicare levy is payable on the taxable component - (see Tax on death benefits below).
Transfer Balance Cap
From 1 July 2017 a general ‘Transfer Balance Cap’ was introduced which limits the amount individuals can transfer into a tax free income stream. On 1 July 2021, the general transfer balance cap was indexed to $1.7 million.
The cap is reviewed annually against the Consumer Price Index (CPI) but only increases in increments of $100,000.
As finance expert, Noel Whittaker points out, the transfer balance cap is not well understood: "Many people are under the false impression that it is the maximum you are allowed to hold in the tax-free pension fund. It is actually the maximum amount an individual may transfer from accumulation phase to pension phase (also known as retirement phase) in their lifetime. When you have transferred up to your cap, you are not allowed to transfer any new funds into pension phase, but the money you hold in this phase can continue to grow."
Individuals have a ‘Personal Transfer Balance Cap’ which states how much of the general Transfer Balance Cap they have utilised. The Personal Transfer Balance Cap can change over time depending on certain types of credits to and/or debits from tax free income streams used.
From 1 July 2021, individuals who start their first retirement phase income stream will have a personal transfer balance cap of $1.7 million.
| Age of member at time of withdrawal | Tax Exempt/Free Component | Taxable Component |
|---|---|---|
| 60 or over | Tax free | 15% plus Medicare levy up to Untaxed Plan Cap 45% plus Medicare levy on amounts above |
| Between preservation age and 60 | Tax free |
|
| Under preservation age | Tax free | 30% plus Medicare levy up to Untaxed Plan Cap. Amounts above untaxed plan cap taxed at 45% plus Medicare levy |
- Payments to superannuants aged 60 and over are taxed at marginal tax rates but a 10% offset applies
- Payments to superannuants under 60 are taxed at marginal tax rates with no offset
- Medicare levy applies if amounts are assessable.
Payments above $100,000
From 1 July 2017, equivalent measures were introduced to align recipients of non-commutable Defined Benefit pensions with those subject to the tax free income stream transfer cap. Defined Benefit pension payments above $100,000 per annum are subject to additional taxation for those aged 60 or over, or for those under age 60 from death benefit income stream where the deceased member was age 60 or over at the time of death. The additional tax treatment depends on the amounts of the untaxed, taxed or tax free components.
- Where payments above $100,000 are from a taxed source made up of either tax free and/or taxable component (taxed element), 50% of the amount above $100,000 is included as assessable income and taxed at the member’s marginal tax rate.
- Where payments from an untaxed source i.e. a taxable component (untaxed element) the excess continues to be included as assessable income but are not eligible for the 10% pension offset.
- Where payments are received from a concessionally taxed capped defined benefit and is made up of both a taxed and untaxed source at the same time, the payment from the taxed source is assessed against the defined benefit income cap first
Taxed source
A lump sum death benefit to a dependant of the member is tax free. If the benefit is paid to a non-dependant or to the member’s estate it can only be paid as a lump sum and tax of 15%* applies to the taxable component. No tax applies to the Tax Exempt component.
If paid as an income stream and the member was aged at least 60 years at death, the payment would be tax exempt to a reversionary beneficiary. If less than 60 at the time of death the taxable component of the income stream would be taxed at the recipients Marginal Tax Rate* however a 15% offset would apply. Once the reversionary reaches age 60 no tax is payable on the whole amount.
If paid to a dependant child the above would apply only until the child was 25, unless the child was permanently disabled, when the balance would be paid as a lump sum tax free. If the payment is made to a child who satisfies the definition of disability, the payments can continue indefinitely.
If the payment is made as an income stream, even if it had not been commenced at the time of death, the above applies.
Untaxed source
Paid to a non-dependant, the whole taxable component is taxed at 30% plus Medicare levy.
Paid to a reversionary beneficiary aged 60 years or more – the income is taxed at MTR* with a 10% offset applying. If the member was less than 60 at the time of death the 10% offset will not apply until the reversionary beneficiary turns 60. Pensions cannot revert to non-dependents and only lump sums can be paid if applicable.
It is important to note that Death Benefit payments received count towards the beneficiary’s Personal Transfer Balance Cap however the amount won’t be credited to the Personal Transfer Balance until 12 months after the death of the original recipient.
From 1 July 2017 a death benefit income stream can be rolled over to a new provider but then cannot be retained in the accumulation phase. The new provider can pay the recipient via another death benefit income stream, a lump sum or a combination of both.
