Taxation of super benefits
Taxation of defined benefit pensions
There are two key issues for the taxation of defined benefit pensions - the amounts, if any, of tax-free component and untaxed element in the taxable component.
Tax-free component: it is necessary to look closely at all aspects of a defined benefit pension and the client's circumstances to confirm whether there is, in fact, a tax-free component and its amount, as outlined in the following tables. Of particular note is the fact that many defined benefit pensions are not eligible for a tax-free component.
Taxable component (untaxed element): defined benefit pensions with an untaxed element of the taxable component are subject to tax at the client's marginal tax rate less a 10% tax offset when age 60 and above. Under age 60, they are subject to tax at the client's marginal tax rate with no tax offset applying. This should be a consideration in any strategies that involve commencing a defined benefit pension with an untaxed element prior to the client turning age 60.
Tax-free component of defined benefit pensions commenced on or after 1 July 2007
|Type of pension||Tax-free component calculation|
|Entirely employer-financed, i.e. no member contributions||Pre July 1983 component, as at date pension commenced|
|Partly member-financed||Pre July 1983 component plus undedicated contributions component as at date pension commenced plus non-concessional contributions made after 1 July 2007|
Tax-free component of defined benefit pensions commenced before 1 July 2007, following a trigger event
|Type of pension||Tax-free component calculation for defined benefit pension commenced prior to 1 July 1994||Tax-free component calculation for defined benefit pension commenced between 1 July 1994 and 30 June 2007|
|Entirely employer-financed, i.e. no member contributions||Nil||Pre July 1983 component, as at date of trigger event|
|Partly member-financed||Unused undeducted purchase price (UUPP) as at date of trigger event||UUPP + Pre July 1983 component, as at date of trigger event|
- The formula under section 27A(1) of the Income Tax Assessment Act 1936 for calculating the undeducted purchase price (UPP) of pensions commenced on or after 1 July 1994 excludes any pre July 1983 component. An allowance for this amount is then added back to determine the tax free component when such a pension is triggered. However, pensions commenced before 1 July 1994 include pre 83 component in their UUPP. Accordingly, section 307-125(6A) of the Income Tax (Transitional Provisions) Act 1997 does not allow any additional pre 83 component to be added back.
- The UUPP will be nil if at 1 July 2007 the client had already exceeded their life expectancy.
- Refer to section 7.16 for more trigger events.
Additional taxation may apply to income over $100,000 paid from a capped defined benefit income stream from 1 July 2017. See section 13.3 for more information on the taxation of pension/annuity payments from capped defined benefit income streams.
Last modified: Friday, January 12, 2018