Taxation of super payments to individuals

What SMSF trustees should know on taxation.

There are two ways in which a member can be paid benefits from a super fund: in lump-sum amounts or as a pension. The tax treatment differs for each of these benefit payments, and also differs depending on the age of the member receiving the benefit. Tax is only ever paid on concessional taxable benefits received and not on non-concessional tax-free benefits received.

Untaxed super benefits

The tax treatment of benefits also differs between payments from a taxed fund as compared to an untaxed fund. The only time an SMSF needs to deal with untaxed superannuation is when super benefits from an untaxed fund, usually public service funds, are rolled into the fund.

When a person rolls their superannuation from an untaxed fund into an SMSF 15 per cent tax is payable on the taxable benefits received by the SMSF. This would normally be paid after the SMSF has lodged the tax return for the year when the benefits were received.

Lump-sum payments

Lump-sum superannuation payments can only be made if a member meets a condition of release. The taxation of those payments differs depending on what type it is and the age of the person receiving it. Where applicable the Medicare levy is also payable.

Retirement benefits

Under 55

For those under 55 the maximum rate of tax on lump-sum taxable super benefits received is 21.5 per cent.

Aged 55 to 59

The tax payable in the 55 to 59 age bracket is split into two components. The first is tax free up to the low-rate lump-sum limit, while the excess is taxed at a maximum of 16.5 per cent. The tax-free threshold is a lifetime limit that increases in line with increases in AWOTE, in $5,000 increments. The limit for 2013-2014 year was $180,000, $185,000 for the 2014-2015, and for the 2015-2016  year it is $195,000.

As this tax-free limit applies to a person for life, it is calculated by adding up all lump-sum taxable super payouts a person receives. Once an individual exceeds the limit tax is payable in the year the payment is received.

This can mean if the lump sum is large enough tax can be paid the first time a person receives a lump sum, or if relatively small lump-sum amounts are taken over several years no tax can be payable to the low-rate lump sum limit increasing .

As the lump-sum threshold increase yearly, depending on increases in AWOTE, a person can pay tax on the first large lump-sum payout and, when the next payout is received some years later they don't pay tax on some or all of a later lump-sum payout. For example the threshold in 2007-2008 was $140,000 and is now $180,000.

Aged 60 and over

For those aged 60 and over lump-sum payouts are tax free and do not even have to be included on a person's tax return.

Permanent disability payouts

For people eligible to receive permanent disability payouts the amount received is exempt from tax and is therefore tax free.

Temporary disability payouts

Temporary disability payments are classed as replacement income and taxed at the member's applicable marginal tax rate.

Death benefits

Death benefits are tax free when received by dependants, but tax is payable at 15 per cent plus the medicare levy when received by non-dependants. Click here to see who is regarded as a dependant.

Pension payments

When a superannuation pension commences that is made up of both concessional taxable benefits and non-concessional tax-free benefits, the percentage for each component is calculated. The percentage relating to each component stays the same for as long as the pension is paid. Tax is only ever payable on taxable pension benefits.

Aged under 55

Superannuation pensions received are treated like any other income for those aged under 55. Tax is paid by the person receiving the pension at their applicable marginal tax rate plus the Medicare levy.

Aged 55 to 59

For people aged 55 to 59 the superannuation pension received is also taxable, as it was for the younger age bracket, but tax is reduced by a 15 per cent tax offset. This means the highest rate of tax and Medicare levy payable on a superannuation pension for people in this age bracket would be 34 per cent including the medicare levy.

An example of how the tax measures work together is Peter Parker. He has worked for years as a consulting psychologist for a major private hospital, specialising in treating people suffering from arachnophobia. At the age of 56 Peter decides to retire, rolls over $800,000 from his employer's super fund into an SMSF, and starts an account-based pension.

As a result of some pre 1983 service, and regular large non-concessional contributions, his superannuation is made up of $400,000 in taxable benefits and $400,000 in tax-free benefits. This results in 50 per cent of his account-based pension being taxable pension benefits and 50 per cent being tax-free benefits.

In the year Peter starts his pension of $40,000 he will pay tax on $20,000. If he has $37,000 in other income his taxable pension is $57,000. The tax and medicare levy payable on the pension is $6900 and the pension tax offset is $3000, leaving Peter with tax payable on his superannuation pension of $3900.

Aged 60 and over

Just as is the case for lump-sum payments, superannuation pensions received by people aged 60 and over are not taxable. The income is treated as exempt income and is not included on their tax return. The tax treatment of an account based pension received is decided by a person's age on the date they receive the pension. 

In Peter's case, if instead of being 56 he was 60 when his pension started, and his income and superannuation pension details remained the same, he would pay no tax at all on the full pension received. If Peter was already in pension phase when he turns 60 the taxable pension payments he received before he turned 60 will be taxable, while those he receives after turning 60 will be tax free.

Permanent disability payouts

The tax treatment for people who are permanently disabled, younger than 60 and receiving a superannuation pension, is the same as an able-bodied person who is aged 55 to 59. This means the pension is taxed at normal marginal rates but the tax payable is reduced by the 15 per cent super pension rebate, no matter how old the member is. As is the case for everyone, no tax is payable if the member is 60 or older.

Temporary disability payouts

Pensions paid as temporary disability payouts are treated as normal income and taxed at normal individual marginal tax rates.

Death benefits

If a member is receiving an account-based pension upon death, it can only be paid to a dependant. To see who are classed as dependants click here. Death benefit super pensions are tax free for people aged 60 and over. For those under 60 the pension is split between the taxable and tax-free components. The taxable portion of a pension will be taxed at the person's applicable marginal tax rate but the person will get the benefit of the 15 per cent pension tax offset.

Where the dependant is a child, someone under 18, they can receive the pension until they reach the age of 25. Once they turn 25 the balance of the superannuation pension account must be paid as a lump sum, unless the person is permanently disabled. Lump-sum death benefits paid to dependent children upon reaching the age of 25 are tax free.

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