You’ve spent the past 40-odd years working your backside off, you’ve built up a decent level of investments and now you’re contemplating retirement. There’s one question that lingers: As a self-funded retiree, will you be paying tax?
This article explains how much a self-funded retiree can earn before paying tax and what you can do to keep tax to a minimum.
Do Self-Funded Retirees Pay Tax?
Self funded retirees do pay tax in Australia. As a self-funded retiree, you will be assessed for tax in the same way as any other Australian. However, because you are a self-funded retiree, you are presumably no longer earning taxable work-related income. Because of this, your marginal tax rate will likely be lower. Plus, you will probably be receiving tax-free payments from a superannuation pension.
As a self-funded retiree, there are a number of ways that you can receive a reasonable level of income in retirement, without paying any tax at all.
How Much Can a Self-Funded Retiree Earn?
A self-funded retiree can earn as much as they like in Australia. As a self-funded retiree, you are not limited to how much you are able to earn. In retirement, your earnings may include investment income, super pension income and maybe even a little bit of casual work-related income.
Despite being entitled to earn as much as you like, there may be a point where your level of earnings will incur some tax. This will be based on the amount you earn and the source of that income.
How Much Can a Self-Funded Retiree Earn Before Paying Tax?
A self-funded retiree can earn up to $33,000 per year of taxable income as a single person and $30,500 per year of taxable income as a member of a couple, before paying any tax. However, as a self-funded retiree, it is likely that the majority of your income will not be taxable income. Instead, you will probably be receiving tax-free pension income from superannuation.
The tax-free threshold for self-funded retirees is $18,200 per person, per financial year. This is the amount of taxable income that can be earned without paying any tax. However, due to tax offsets available to retirees, you can, in fact, earn more than $30,000 before paying tax, as mentioned above.
Keep in mind that these figures only relate to taxable income and the majority of most self-funded retirees’ income will be sourced from tax-free superannuation income streams, such as an account-based pension or defined benefit pension.
Related Article: How Much Can I Withdraw From Super Tax Free?
This video explains when you can access your super tax-free.
How Can a Self-Funded Retiree Reduce Tax?
A self-funded retiree can reduce tax in a number of ways, such as making contributions to superannuation and commencing an account-based pension.
Each of these strategies are explained below.
Making Super Contributions
By making contributions to super, you can not only reduce personal income taxes, but you will also be investing within the tax-effective superannuation environment.
The two main types of contributions you make to super are concessional and non-concessional contributions. Concessional contributions effectively reduce your personal taxable income by the contribution amount, but incur contributions tax upon entering super; whereas non-concessional contributions do not reduce your personal income tax, but do not incur contributions tax.
Both types of contributions result in more of your wealth being invested in the tax-effective superannuation environment. Within a superannuation accumulation account, all earnings derived from investments are taxed at a maximum of 15%. This can often be lower than the tax-rate if you were to own investments in your personal name, where tax on earnings could be as high as 47%.
This is how super contributions can reduce tax.
Related Article: How Much Can I Contribute to Super?
Start an Account-Based Pension
Once you retire (or even before), you will probably be using your superannuation accumulation balance to commence an account based pension. Once you do, your total account based pension balance will be invested. All investment earnings, including capital gains, received from assets supporting your account based pension, will be received completely tax-free.
In addition to investment earnings being received tax-free, all pension income paid into your personal bank account from an account-based pension will be received tax-free from age 60, onwards.
This is how an account-based pension can reduce tax.
Learn more: Can Self Funded Retirees Get the Pension
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Frequently Asked Questions
Here are some frequently asked questions around self-funded retirees paying tax in Australia.
Do Self-Funded Retirees Have to Do a Tax Return?
Self-funded retirees need to do a tax return if their taxable income for the year exceeded $18,200 (per person). There are also other instances a self-funded retiree might need to lodge a tax return, such as if they made certain types of super contributions, received any Government payments throughout the year, operated a business, received certain taxable payments from superannuation or had PAYG payments deducted throughout the year, to name a few. You can use this ATO tool to see if you need to lodge a tax return for the year.
Do Self-Funded Retirees Have to Pay the Medicare Levy?
Self-funded retirees do need to pay the Medicare Levy in instances where they are required to submit a tax return. A self-funded retiree is not exempt from the Medicare Levy.
What is a Tax Offset For Self Funded Retirees?
A tax offset for a self-funded retiree is an amount that reduces any income tax payable. Types of tax offsets include the low-income tax offset (LITO) and the seniors and pensioners tax offset (SAPTO). You can use this ATO tool to see if you are eligible.
Do Self-Funded Retirees Pay Capital Gains Tax in Australia?
Yes, self-funded retirees do pay capital gains tax in Australia if they sell an investment for more than they purchased it for. The same capital gains tax (CGT) rules apply to self-funded retirees as all other Australians. However, because a self-funded retiree will generally have lower overall taxable income, the assessable capital gain could incur less tax compared to a working Australian, due to the marginal tax rate system.
If a self-funded retiree sells an investment owned within superannuation, capital gains tax will only be payable if the asset is sold within an accumulation account. If sold in a pension account, no CGT will be payable.
What Percentage of Australian Retirees are Self-Funded?
Approximately 43% of Australian retirees are self-funded according to the Association of Superannuation Funds of Australia.
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