AT THE heart of the new superannuation system was a simplification of the components of a person's benefits. The many different types of super were reduced to just two, taxable and tax-free benefits. As a result of changes to marginal tax rates for the 2013 year, some people will be paying more tax on their super benefits received.
Taxable benefits are made up of concessional contributions and income added to a member's account. Concessional contributions are those that have resulted in a tax deduction and for most people will be the compulsory employer super guarantee contributions. They also include tax-deductible contributions made by individuals classed as self-employed.
The tax treatment of taxable benefits differs depending on when the benefits are received, how the benefits are paid, and who they are paid to. Anyone who is 60 or older pays no income tax on their taxable lump sum or pension benefits received. Taxable benefits paid out on the death of a member to non-dependants are taxed at 15 per cent.
When taxable benefits are paid as a lump sum to someone under 60 no tax is payable for the 2013 financial year up to maximum of $175,000. Lump sum payments in excess of this are taxed at 15 per cent.
Taxable benefits received as a pension for someone under 60 are taxed at the applicable marginal tax rate but receive a 15 per cent tax offset. Up until June 30, 2012 this meant most people under 60 receiving taxable super pension benefits paid no income tax where their taxable income did not exceed $37,000. On taxable income of between $37,000 and $80,000, tax was effectively paid at 15 per cent.
With new tax rates applying from July 1, 2012, someone under 60 receiving taxable super pension payments can pay tax, after taking account of the 15 per cent tax offset, of 4 per cent up to a total taxable income of $37,000, and 17.5 per cent on taxable income of between $37,000 and $80,000.
For most people tax-free super benefits are made up of only non-concessional super contributions. These are contributions made from tax-paid money and were once called undeducted contributions. A small number of people can also have tax-free super benefits made up of small business retirement exemption contributions.
The value of tax-free benefits can only increase with new contributions and are decreased by lump sum or pension payments. Tax-free super benefits are not taxable whether they are received as a lump sum or a pension, no matter the age of the person receiving them. Tax-free benefits paid to non-dependants upon the death of a member are also not taxable.
Once a pension is started in a super fund the percentage value of tax-free and taxable benefits are locked in for the life of that pension. Timing can therefore be important for making non-concessional contributions and starting a super pension.
When someone is eligible to receive either an account-based pension or a transition-to-retirement pension, and they also have the ability to make a large non-concessional contribution, it makes sense to commence the pension from taxable benefits first and then make the non-concessional contribution.
Once the non-concessional contribution has been made, another pension can be commenced from the tax-free benefits. Over time minimum payments would be taken from the 100 per cent tax-free pension with the balance coming from the taxable pension. This will mean tax payable by non-dependent beneficiaries upon the death of a member will be minimised.
Frequently Asked Questions about this Article…
What is the difference between taxable and tax-free super benefits?
Taxable benefits are made up of concessional contributions (like compulsory employer super guarantee and tax‑deductible contributions for the self‑employed) plus investment earnings added to your account. Tax‑free benefits are generally non‑concessional contributions – contributions made from after‑tax money – and in a few cases small business retirement exemption contributions.
Will people pay more tax on super after the changes to marginal tax rates?
Yes — the article notes that changes to marginal tax rates for the 2013 year mean some people will pay more tax on their super benefits. How much tax you pay depends on whether your benefits are taxable or tax‑free, your age, and whether benefits are paid as a lump sum or a pension.
How are taxable super lump‑sum payments taxed for people under 60?
For the 2013 financial year, taxable lump‑sum payments to someone under 60 are tax‑free up to a maximum of $175,000; lump sums above that amount are taxed at 15%.
How are taxable super pension payments taxed for people under 60 after July 1, 2012?
Taxable super pension payments to someone under 60 are taxed at the recipient’s marginal tax rate but receive a 15% tax offset. Under the post‑July 1, 2012 rates described in the article, after the offset that results in an effective tax of about 4% up to $37,000 of taxable income and about 17.5% on taxable income between $37,000 and $80,000.
Are tax‑free super benefits ever taxable?
No. Tax‑free benefits (mainly non‑concessional, after‑tax contributions and some small business retirement exemption amounts) are not taxable when paid as a lump sum or a pension, regardless of the recipient’s age. They are also not taxable if paid to non‑dependants on the death of a member.
How does age 60 affect tax on super benefits?
Anyone aged 60 or older pays no income tax on their taxable lump‑sum or pension benefits — in other words, both taxable and tax‑free components are tax‑free for people aged 60+ when received as super benefits.
How are death benefits taxed when paid to non‑dependants?
Taxable benefits paid on the death of a member to non‑dependants are taxed at 15%. By contrast, tax‑free benefits paid to non‑dependants on death are not taxable.
What practical timing strategies can everyday investors use to maximise tax‑free super benefits?
Because the percentage split of tax‑free and taxable components is locked in once a pension starts, timing matters. If you can start an account‑based or transition‑to‑retirement pension and also make a large non‑concessional (after‑tax) contribution, the article recommends starting a pension from your taxable benefits first, then making the non‑concessional contribution and commencing a second pension from the tax‑free balance. Over time you’d draw the minimum payments from the 100% tax‑free pension and the rest from the taxable pension, which helps minimise tax for non‑dependent beneficiaries on death.
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