How retirement will affect your tax


As you reach your senior years, your thoughts will likely turn to retirement.

The chances are you've been working for much of your adult life and are looking forward to some more spare time to spend with the family or to go traveling.

It's a golden picture of a fulfilling, carefree retirement painted in a thousand commercials for superannuation funds but it's a picture that rarely accords with real life.

how retirement will affect your tax

In practice, the amount people save in super is rarely enough to support the lifestyle they envisage living and the reality for many is that they need to keep on working, even if only in a part-time capacity.

Fortunately, the tax system favours senior Australians so in addition to the tax-free benefits of super, there are a number of other tax incentives available which can make it easier to get by.

Income tax post-retirement

Once you are over 60, you can generally access your super tax-free (but see below).

The exception is where you are a member of an "untaxed" superannuation fund, which are usually government schemes where the benefits have not previously been subject to taxation.

Unlike the age pension, this isn't affected by the level of your other income.

In addition, if you are under the pension age of 67, you can earn up to the $21,884 in non-super income (such as wages from a part time job) and pay no income tax.

This is because you'll benefit from the combination of the $18,200 tax free threshold and the low income tax offset of $700, which equates to an additional tax free amount of $3,684.

Once you pass the age pension age (67 years), you can earn up to $32,279 (if you're single) without paying income tax, in addition to your tax free super.

This is because you become eligible for the Seniors and Pensioners Tax Offset (SAPTO). Couples can jointly earn $57,948 (on top of super) without having to pay tax, thanks to the SAPTO.

You can earn up to $50,119 (if you're single) or $83,580 (for couples) in non-super income and still get some benefit from the SAPTO, though the benefit is less since it phases out the more you earn (and disappears altogether above those income levels).

Retirement living: Tax on superannuation withdrawals

By the time you reach the point at which you can access your super, your fund will have grown thanks to a combination of the contributions your employers paid in during your working life, any additional personal contributions you made when your cash flow allowed and the investment returns earned by the fund.

Set against that, the fund will have paid some tax and the super fund will have deducted fees and charges for running your fund.

In an ideal world, the investment returns made by your fund will have substantially exceeded the taxes, fees and charges levied over the years.

When you become eligible to access your super you can either take a super income stream to provide you with a regular income as you grow older, or you can withdraw some or all of your super as a lump sum.

Super income streams

There are two types of super income streams; account-based pensions (which have no set time period) or annuities (which are fixed for a specific time period). They in turn consist of taxable and tax-free elements.

The taxable part of your super fund consists of:

  • Contributions paid by your employers over the years
  • Salary sacrificed contributions
  • Contributions made by you where a tax deduction was claimed

The tax-free part of your super fund consists of:

  • Contributions made from your taxed income (non-concessional contributions)
  • Government co-contributions

For people aged 60 and over, benefits from a taxed super fund (i.e. the vast majority of super funds) are tax-free.

The only notable exception to that rule is for certain public sector super schemes which do not pay tax on super contributions and fund earnings.

In that case, the tax-free component (if any) of such a pension is not subject to tax but any pension income paid from a taxable component of the fund is taxed at your marginal tax rate (plus Medicare levy) less a 10% tax offset.

Lump sum withdrawals

If you are aged 60 or over any lump sum withdrawals from a taxed super fund are generally tax-free.

If you are taking a lump sum from certain untaxed (public sector) schemes, different rules apply and the lump sum will not necessarily be tax free.

If there is a tax-free component to the lump sum, no tax will be payable but if there is a taxable component, income tax will be payable on the lump sum.

If you are over 60, income tax is payable at 17% including the Medicare levy for all income up to $1.705 million or 47% including the Medicare levy on all income above that.

The age pension

Unlike your super withdrawals, the age pension (payable once you reach 67 years old) does have an income test.

Your eligibility for the age pension is worked out by taking into account how much income you get (the income test) and how much your assets are worth (the assets test). The test that results in the lower pension rate will be the one applied.

In terms of income, this includes money from employment, as well as income from pensions, annuities, other investments and overseas income. A single person can earn up to $204 per fortnight ($360 for a couple) and still get a full age pension.

If your income is above this level, your pension payment will be reduced by 50c (single) or 25c (couple, each) for each dollar over the threshold. That means that a single person can earn up to $62,332 ($95,336 for a couple) per year and still get a part age pension.

Your income for the purposes of this test includes reportable super contributions and net investment losses.

Any superannuation pension you receive is included in the income test but not on the basis of the actual pension payments you receive; instead, it will be subject to deeming rules, by which a deeming rate is applied to the value of the pension assets, and this notional income is included as income for the purposes of the income test.

When you need to lodge a tax return in retirement

The Australian Taxation Office (ATO) expects to hear from you, even in retirement. Here's what you need to know.

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.
Merrilyn Tattersall
February 14, 2024 1.29pm

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