“Hidden” taxes you may not know about.
Superannuation is the most tax effective vehicle to fund your retirement – a concessional tax rate of 15% while in accumulation and then a tax free income stream in retirement, right? Well that’s true most of the time.
The majority of Australians will accumulate their superannuation throughout their working life and once they hit 65(ish) they retire. But there are two important factors in the scenario that will determine the tax treatment of your pension.
- Type of superannuation fund
- Your age
Type of Superannuation Fund
The most common superannuation fund is the accumulation style. Through various contributions, you put away money through your working life to find your retirement.
There is however another type of superannuation fund called a defined benefit fund. This type of fund was common in larger corporations and government departments. In this type of fund, your final balance was a function of your final salary and the years you worked at the company. It sought to provide a type of ‘loyalty bonus’ to employees.
As you don’t make contributions to the fund nor pay tax with the fund, this is called an “untaxed fund”
These types of fund have become less common as they are large liabilities on a company’s balance sheet. The tax treatment of an untaxed component form untaxed funds differs than that of the taxed component.
Your Age
Your age when you draw your pension will affect how it is taxed. If you retire early under your “Preservation Age,” although concessionally taxed – your pension is not tax free.
| Date of Birth | Preservation Age |
|---|---|
| Before 1 July 1960 | 55 |
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| From 1 July 1964 | 60 |
Based on the components of your superannuation and your age, the tax treatment of your pension will differ as set out below:
| Component | Tax Treatment | ||
|---|---|---|---|
| Under preservation age | Preservation age to 59 | 60 and over | |
| Tax-free component | Tax-free | Tax-free | Tax-free |
| Taxable component – taxed element | Marginal tax rate | Marginal tax rate with 15% tax offset | Tax-free |
| Taxable component – untaxed element | Marginal tax rate | Marginal tax rate | Marginal tax rate with 10% tax offset |
Superannuation and your Estate
Just as your age and the composition of your pension dictates your pension’s tax position when you are alive, it can also have an effect when you pass. Depending on your estate’s beneficiaries, there could be ‘hidden taxes’ that are payable before distributed to them.
When looking at your estate plan, it is important to consider your superannuation beneficiaries. The net amount that will be paid to them may be less than you intended and may lead to disputes between your beneficiaries.
| Paid to Tax Dependant | |
| Amount | Tax treatment |
| Lump sum | Tax-free |
| Pension – deceased and/or primary beneficiary age 60 or over | |
| Tax-free component | Tax-free |
| Taxable component – taxed element | Tax-free |
| Taxable component – untaxed element | Marginal tax rate1, 10% tax offset applies |
| Pension – deceased and primary beneficiary both under age 60 | |
| Tax-free component | Tax-free |
| Taxable component – taxed element | Marginal tax rate1, 15% tax offset applies |
| Taxable component – untaxed element | Marginal tax rate1 |
| Paid to Non Tax-Dependant | |
| Amount | Tax treatment |
| Lump sum only | |
| Tax-free component | Tax-free |
| Taxable component – taxed element | 17% |
| Taxable component – untaxed element | 32% |
Definition of a tax dependant: https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Early-access-on-compassionate-grounds/?page=3
Superannuation continues to be the most efficient way to fund your retirement, although there are intricacies within it that can catch you out if you are not careful. With any superannuation planning, it is important to get the right advice from a professional. Schedule a no-obligation Discovery Chat with us to explore how professional advice can help you.
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The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. Louella Jorge is an Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429. This editorial does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser before you act
