You’ve worked your backside off paying taxes for the best part of 40 years and now it’s time to bask in the glory of all the tax concessions afforded to Australian retirees. But, unless you know the rules, the retirement taxes you pay could be significantly more than they need to be.
Retirement Tax in Australia
In Australia, there is no specific retirement tax, but there are a number of general taxes that apply to retirees, depending on the types of income you receive, the investments you own and how the investments are owned.
This article explains the types of taxes a retiree might incur and when such taxes might be applicable.
Do Retirees Pay Tax in Australia?
Yes, retirees do pay tax in Australia. The taxes you pay in retirement are largely the same as the taxes paid prior to retirement. However, as a retiree, there are more opportunities available to you to minimise or even eliminate taxes in retirement.
Listed below are the five main instances a retiree will incur tax throughout retirement.
1. Investment Taxes in Retirement
As a retiree, you might own investments in your personal name, such as investment properties, shares, managed funds, term deposits or bank accounts.
The income (rent, dividends, interest, etc.) received from these investments will be assessable for income tax purposes and the combined amount, together with any other taxable income, will be assessed at your marginal tax rate.
Furthermore, should you sell any investments owned in your personal name, any realised capital gain will be added to your income and assessed for capital gains tax purposes.
You may be able to reduce income tax and capital gains taxes by making personal concessional contributions to super each year.
Learn more about Personal Concessional Contributions.
2. Super Pension Taxes in Retirement
If, in retirement, you use your superannuation to commence an income stream, such as an account-based pension, these pension payments may be taxable, depending on your age and the tax components of your super balance.
Generally, superannuation pension payments are received tax-free when aged 60 or over. If you are under age 60, but above your superannuation preservation age, the taxable component portion of your pension payments will be assessed for tax, but you will receive a tax offset. And, finally, if your super includes an untaxed component, the portion of your pension payment will be assessed for tax, regardless of whether you are over or under age 60.
Learn more about Tax on Superannuation Pension Payments
3. Lump Sum Super Withdrawal Taxes in Retirement
If you make a lump sum withdrawal from your superannuation in retirement, the lump sum will usually be received tax-free if you are aged 60 or over.
If you are under age 60, but over preservation age, the tax-free component portion of the lump sum withdrawal will be received tax-free and the taxable component portion will be tax-free up to the lifetime low-rate cap limit of $235,000.
If your super includes an untaxed component, this will be assessed for tax purposes, both over and under age 60.
Learn more about Lump Sum Super Tax
4. Super Earnings Taxes in Retirement
Your superannuation balance is invested and earns income in the form of bank interest, distributions, dividends and rents; as well as capital growth, when the price of your investments increase in value.
The tax on superannuation earnings depends on whether your superannuation is held in accumulation phase or pension phase.
This video explains the types of taxes you pay inside super:
Tax on Super Earnings in Accumulation Phase
The tax on superannuation income earnings within an accumulation account is a flat rate of 15%. The assessable income for tax purposes can be reduced by any tax deductions, or the actual tax payable might be reduced by any imputation credits.
The tax on realised capital gains within an accumulation account is also 15% in the year that the investment is sold. However, a 1/3rd discount to the gain is applied if the investment sold was owned for longer than 12 months – effectively reducing the capital gains tax to 10%.
Tax on Super Earnings in Transition to Retirement Phase
The tax on superannuation investment earnings within a transition to retirement account is identical to the tax applied to superannuation earnings within an accumulation account.
Tax on Super Earnings in Pension Phase
The tax rate on superannuation income earnings within a pension account is 0%. That is, all investment income returns are received completely tax-free. Furthermore, all realised capital gains are also received completely tax-free. So, there is no tax on any investment earnings for assets that are supporting a pension.
Learn more about Tax on Super Earnings
5. Age Pension Taxes in Retirement
If you are in receipt of Age Pension payments in retirement, the Age Pension payments received will be assessed for income tax purposes.
Age Pension payments are added together with any other forms of taxable income and taxed at your individual marginal tax rate.
Related Article: How Much Can a Pension Earn Before Paying Tax?
What Age Do You Stop Paying Tax in Australia?
There is no age that you stop paying tax in Australia. Taxable income in Australia will always be taxable income, regardless of your age.
There are certain ages that the amount of your assessable income may reduce, such as when you enter retirement and your taxable work-related income is replaced by tax-free pension income.
Age 60 is also a significant age in relation to income taxes, because it is at this age that you can receive tax-free pension income from superannuation. Even if you are still working, you might consider contributing taxable work-related income to super and draw down tax-free pension income by implementing a transition to retirement strategy.
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Frequently Asked Questions
Here are some frequently asked questions in relation to tax in retirement.
Do Retirees Pay Capital Gains Tax in Australia?
Retirees pay capital gains tax in Australia for investments that are sold in their individual names. Specifically, if a retiree sells an investment owned by them personally, the capital gain amount (less any CGT discounts) will be assessed and taxed at their marginal tax rate.
However, if a retiree owns investments within superannuation, no capital gains tax will be payable on investments within a pension account, whereas tax of up to 15% will be payable within a superannuation accumulation or TTR pension account.
Is My Retirement Income Taxable
Yes, your retirement income is taxable if it is classified as taxable income, but is not taxable if it is not. Some examples of taxable income in retirement include bank interest, share dividends, rental income and Age Pension payments. An example of non-taxable income is superannuation pension income.
What is Considered Taxable Income in Retirement?
Taxable income in retirement is considered to be forms of income such as investment income (bank interest, share dividends, managed fund distributions, rental income) and Age Pension payments. Superannuation pension payments are generally not taxable income from age 60 onwards.
How Much of Retirement Income is Taxable?
The amount of your retirement income that is taxable depends on the type of income being received. Generally, superannuation pension income will be received tax-free from age 60 onwards. Other types of income, such as income derived from investments and Age Pension payments will continue to be taxed at your marginal tax rate, whether you are retired or not.
How is Income Taxed in Retirement?
Income is taxed in retirement in the way that it is taxed prior to retirement. All taxable income is combined, added-up, assessed and taxed at your individual tax rate. However, superannuation pension income is received tax-free once you attain age 60.
How Can I Avoid Paying Taxes on Retirement Income?
You can avoid paying taxes on retirement income by having the majority of your assets invested within the superannuation environment and using your superannuation balance to commence an account-based pension. All income payments received by you personally from an account-based pension are tax-free from age 60 onwards. Furthermore, all earnings from your investments held within an account-based pension are received completely tax-free.
What is My Tax Rate in Retirement?
Your tax rate in retirement is the same as your tax rate prior to retirement. However, in retirement it is likely that you will have less taxable income as you will not be working and will therefore not have any work-related income being taxed at your marginal tax rates. Instead, you will likely be receiving tax-free superannuation pension income.
Other income, such as investment income or Centrelink Age Pension payments, will continue to be taxed at your individual tax rate.
How Much Can I Earn in Retirement Before Paying Tax?
The amount you can earn in retirement before paying tax is around $33,000 for a single person and $30,500 for each member of a couple. This assumes that you are eligible for the low income tax offset and seniors and pensioners tax offset.
The amount of superannuation pension income you can receive from age 60 onwards before paying tax is unlimited, due to this type of income being received completely tax free from this age.
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