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Taxation of super benefits

Taxation of super lump sums

Section: 7.1

Taxation of super lump sums - taxable component for 2016/17

Age Taxable component of taxed element  Max tax rate Taxable component of untaxed element  Max tax rate
60 and above Non-assessable non-exempt income (NANE) 0% First $1.415 million (untaxed plan cap)
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Balance over $1.415 million (untaxed plan cap)
 
15%
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45%
 
Preservation age to 59 First $195,000 (low rate cap)
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Balance over $195,000 (low rate cap)
0%
------------
15%
First $195,000 (low rate cap)
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$195,000 (low rate cap) to $1.415 million (untaxed plan cap)
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Balance over $1.415 million (untaxed plan cap)
 
15%
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30%

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45%

Below preservation age Whole component 20% First $1.415 million (untaxed plan cap)
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Balance over $1.415 million (untaxed plan cap)
 
30%
------------
45%

Note: For all non-zero tax rates, Medicare levy may also apply.

Tax-free component
In all cases, regardless of age, the tax-free component of a super lump sum is not assessable income and is not exempt income. No tax is paid on these amounts.

Taxable component
The taxable component of a super lump sum may be either a taxed element or an untaxed element.

Taxed element
The default position is that the taxable component is wholly a taxed element. A taxed super fund will generally not have super member benefits that have an untaxed element. Where an untaxed element is received by a taxed super fund, the receiving fund will deduct 15% tax on receipt of the funds converting the amount to a taxed element.

Untaxed element
Specific provisions provide for limited situations where there is an untaxed element. Where a super benefit contains an untaxed element, that amount has not been subject to fund tax (up to 15%). For this reason, higher tax rates are applied to untaxed elements.

Situations where there is an untaxed element

  • Super benefits paid from untaxed super schemes contain an untaxed element where no contributions and earnings tax have been paid. These schemes are generally run by the Australian Government and State and Territory governments. These generally apply to public servants, and fall into two broad categories, public sector super schemes and constitutionally protected funds.
  • Where a super benefit is paid from a super fund that came into operation on or before 5 September 2006, the trustees of certain untaxed super schemes may give the recipient written notice specifying an amount as the untaxed element.
  • Small super account payments.
  • Superannuation holding account payments and SG Shortfall amounts paid by the Commissioner of Taxation to the individual.
  • Certain death benefit super lump sums that include insurance benefits paid from a taxed super scheme. See section 7.3 for taxation of super death benefits.

Tax offset if under age 60
For people under the age of 60, the entire taxable component is assessable income. However, a tax offset is available to ensure that the maximum rate of tax paid does not exceed the rates in the table above.

A super provider withholds tax at the maximum tax rates in the table above. Tax withheld is credited against tax debts, so if a person is on a lower marginal tax rate than the rates at which tax is withheld, they may be entitled to a refund when they lodge their tax return.

Low rate cap
The low rate cap for 2016-17 is $195,000, subject to indexation in later years and decreases according to individual circumstances.

The low rate cap applies to people aged between preservation age and 59. It is the amount of taxable component that receives a rebate so that the taxed element is effectively taxed at 0%, and the untaxed element is effectively taxed at 15% (special rules apply if both taxed and untaxed elements are received within the same financial year - see 'decreases' section).

Note: Lump sums that a client receives prior to preservation age do not count toward their low rate cap.

Withdrawals within low rate cap may still impact Government benefits

While any taxable component of a lump sum withdrawal that falls within a client's low rate cap will be subject to no tax (taxed element) or concessional tax (untaxed
element), it is important to note that because all the taxable component received by a client aged under 60 is included in their assessable income for tax purposes,
these amounts of taxable component received within a client's low rate cap may still impact on their situation by reducing any Government benefits and offsets that
they receive that are based on assessable or taxable income. Benefits and offsets that may be negatively impacted include:

  • Family tax benefit Part A and B
  • Child Care Benefit
  • Government co-contribution and low income super contribution
  • Low income tax offset
  • Seniors and Pensioners Tax Offset

Decreases
A person's low rate cap for a financial year is reduced (but not below zero) by:

  • the taxable component of super lump sum benefits received in previous financial years that received the low rate cap offset in those years, and
  • taxable components of super lump sum benefits received in the same financial year, with the taxed element taking priority for the rebate.
Example
Tracey, age 58, receives a super lump sum benefit with both an untaxed element of $120,000 and a taxed element of $195,000 during 2016-17. She has not previously made any lump sum withdrawals from super. The taxed element will receive an offset resulting in nil tax paid. Tracey's low rate cap is reduced by $195,000 to zero. Since Tracey does not have a low rate cap to apply to the untaxed element, she is effectively taxed at 30% on the $120,000 untaxed element. Since the offsets are applied at the end of the financial year through Tracey's tax return, it does not matter in which order she receives the super lump sums. The offset will be applied to the taxed element first.

Untaxed plan cap
The untaxed plan cap for 2016/17 is $1.415 million.

The untaxed plan cap applies to members of untaxed super plans. The cap is measured on a per plan basis. Untaxed elements in excess of the untaxed plan cap paid as super lump sums are taxed at the highest marginal tax rate of 45% (Medicare levy may also apply, and the Temporary Budget Repair levy).

Indexation
The low rate cap and untaxed plan cap are indexed annually to AWOTE, in $5,000 increments. That is, the indexation has to be at least $5,000 before the low rate cap will rise.

Effect of super lump sums on other assessable income
The tax-free component is not included in assessable income. Different rules apply to the taxable component depending on whether the element is taxed or untaxed and the age of the person. The untaxed element of a super lump sum will be included in a person's assessable income whereas the taxed element will only be included for people under 60. Super lump sums are considered to be in the top 'slice' of a person's total assessable income. Therefore, super lump sums will not push other assessable income into a higher than normal tax bracket.

The explanatory memorandum accompanying the Taxation Laws Amendment (Superannuation) Bill 1989 stated:

'Any potential rebatable amounts are presumed to form the top slice of taxable income and to fall within that slice in the order, working from the highest to the lowest'.

Last modified: Tuesday, May 2, 2017