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Capped defined benefit income streams

Taxation of pension/annuity payments from capped defined benefit income streams

Section: 20.4

Certain pension / annuity payments from capped defined benefit income streams exceeding the defined benefit income cap ($100,000 for 2017/18) will be subject to additional taxation from 1 July 2017.

The following pension/annuity payments from capped defined benefit income streams count towards the defined benefit income cap:

  • payments to those age 60 or over, or
  • payments paid to clients under age 60 from a death benefit income stream where the deceased member was age 60 or over at the time of death.
Defined benefit income cap:

A client's defined benefit income cap for a financial year is:

general transfer balance cap

16

The defined benefit income cap for 2017/18 is $100,000

Modified tax on defined benefit income cap amounts

Where a client receives pension / annuity payments from a capped defined benefit income stream above their defined benefit income cap, the excess amount is subject to additional taxation.

Modification to the income tax treatment of payments from a capped defined benefit income stream will only apply where:

  • the amount counts toward the defined benefit income cap (outlined above)
  • the total amounts that count toward the defined benefit cap exceed that cap.

Where pension/annuity payments from a capped defined benefit income stream consist of both taxed source and untaxed source benefits, these payments should be assessed against the defined benefit income cap in the following order:

  1. Tax-free component and taxable component (taxed element)
  2. Taxable component (untaxed element).

The modified tax treatment is outlined in the table below.

Modified taxation treatment of capped defined benefit income stream payments

Payments that count towards the defined benefit income cap Component Standard tax concession Modified tax treatment
Defined benefit income paid to a member:
  • age 60 or over or
  • under age 60

from a death benefit income stream where the deceased member was age 60 or over at the time of death.

Tax-free Not assessable and not exempt

(NANE)

If (tax-free + taxed element) is:
  • within defined benefit income cap: NANE
  • over defined benefit income cap: 50% x (tax free + taxed element) in excess of cap is included in assessable income.
Taxable

(taxed

element)

Not assessable and not exempt

(NANE)

Taxable

(untaxed

element)

MTR less tax offset equal to 10% of the untaxed element If the total of (tax-free + taxed element + untaxed element) is:
  • within defined benefit income cap: untaxed element taxed at MTR less 10% tax offset (any tax-free and taxed element: NANE)
  • over defined benefit income cap: taxable (untaxed element) taxed at MTR. 10% tax offset not applicable to amount exceeding cap.

Effectively, if the payment is 100% untaxed element, the whole payment is assessable and the 10% tax offset is limited to a maximum of $10,000.

Note: As he tax free component is included when working out the modified tax treatment from 1 July 2017, it can be subject to taxation where the tax free + taxable 9taxed elements) exceed the $100,000 defined benefit income cap.

Example:

Josh is age 63 and receives a capped defined benefit income stream of $170,000pa in 2017/18, made up of the following components:

  • $20,000 tax-free
  • $100,000 taxable (taxed element)
  • $50,000 taxable (untaxed element)

All of these amounts count towards the defined benefit income cap as they are paid from a capped defined benefit income stream, and Josh is aged 60 or over.

Step 1: consider tax-free and taxable (taxed element)

  • 50% x (tax free + taxed element) in excess of cap included in assessable income
  • 50% x (($20,000 + $100,000) - $100,000) = $10,000 included in assessable income
  • $110,000 remains not assessable and not exempt income

Step 2: consider untaxed element

  • Untaxed element in excess of cap, not eligible for 10% tax offset
  • As cap already used with tax free and taxable (taxed element), the entire untaxed element of $50,000 exceeds cap
  • $50,000 untaxed element is included in assessable income, nil tax offset applies.

Part year reduction of defined benefit income cap

A client's defined benefit income cap will be pro-rated where:

  • the capped defined benefit income stream commences part way through the year, or
  • the client becomes entitled to concessionally taxed payments from a defined benefit income stream part way through a year, ie they turn age 60 part way through a year.
Example:

Sanjay is age 65. He commences a capped defined benefit income stream on 24 November 2017.

Sanjay's defined benefit income cap for 2017/18 is:

$1.6 million / 16 x (219 days / 365 days) = $60,000

Last modified: Thursday, January 11, 2018