Like most Australians, you have paid income tax throughout your working life. Now that you are retired, will you still have to pay tax? Well, it depends. While there are many ways people save and invest for retirement, different investments and structures have different tax rates, benefits and incentives that need to be considered.
In this article, we will discuss what taxes may be payable on retirement income.
Do Retirees Need to Pay Tax in Australia?
While some retirees may need to pay tax, the tax system is structured in a way to reduce the amount of tax payable by retirees. However, it is important to understand how these structures work and how to benefit from them to minimise how much tax you may pay in retirement. Learn more about this from our financials advisory team, which specialises in financial advice for retirees.
What is Taxable Income and What is Tax-Free?
The Australian tax system provides benefits including a tax-free threshold and also tax friendly investment structures including Superannuation and Account Based Pensions.
In the 2024-25 financial year, the effective tax-free threshold is $18,200 per annum per person. Meaning that there is no income tax payable up to this amount for individuals.
The earnings on investments held in Superannuation are taxed up to 15%, and the earnings on investments held in Account Based Pensions are taxed at 0%. However, if your total superannuation balance is over a certain amount, additional taxes may apply.
So, depending on where your retirement income comes from and what structure it is in, you may end up paying some tax in retirement.
When Does a Retiree Need to Pay Taxes?
The payment of tax will depend on a number of factors. If you have personal income from bank interest, rental income, dividends and investment distributions, which are over the tax-free threshold, you may have to pay income tax. If you do nothing with your superannuation, the earnings may be taxed up to 15%. If you commence an Account Based Pension the tax rate on earnings may be 0%. Furthermore, there may be hidden taxes within your superannuation and Account Based Pension, which may impact your beneficiaries.
Lump Sum Super Withdrawals
If you are over age 60 and retired, you can generally make a withdrawal from your superannuation tax free. However, you may have an untaxed element in your superannuation fund, which would be taxed up to 15% on the first $1.780 million and then up to 45% on any balance over $1.780 million.
Super Earnings
As discussed above, earnings within superannuation are generally taxed up to 15%. Furthermore, any Capital Gains Tax is 33.33% of this amount (i.e., 10%).
It’s important to note that there is proposed legislation “Div 296” which would impact individuals who have a total super balance of over $3 million. Div 296 tax is to take effect from 1 July 2025. It is proposed that an additional amount of 15% tax is payable on total superannuation balances in excess of $3 million (including any unrealised capital gains). This is proposed legislation subject to the Bill making its passage through both houses before 30 June 2024.
Super Pension
These are also known as Account Based Pensions. As discussed above, earnings within an Account Based Pension are taxed at 0%. Furthermore, there is no capital gains tax applied with selling assets in an Account Based Pension.
It’s important to note that there is proposed legislation “Div 296” which would impact individuals who have a total super balance of over $3 million. Div 296 tax is to take effect from 1 July 2025. It is proposed that an additional amount of 15% tax is payable on total superannuation balances in excess of $3 million (including any unrealised capital gains). This is proposed legislation is subject to the Bill making its passage through both houses before 30 June 2024.
Investment Earnings
As discussed above, individuals in retirement can benefit from the tax free threshold amount of $18,200. However, if your total income in retirement if higher than this amount and you do not qualify for the Senior and Pensioners Tax Offset (SAPTO) you will pay tax on any income above this amount.
Taxable income includes bank interest, employment income, royalties, rental/lease income, dividends and investment distributions.
Age Pension
The Age Pension is considered a taxable payment from Centrelink. However, age pensioners can benefit from the Tax Free Threshold and also the Seniors and Pensioners Tax Offset (SAPTO), meaning that they will not pay tax if their total income is below $31,888 for each member of a couple or $35,812 for a single.
Are There Any Tax Benefits for Pre-Retirees?
You will be pleased to know that there are some tax benefits available for pre-retirees.
This can include the ability to make additional pre-tax contributions (concessional contributions) to superannuation. If you qualify to do so, this can be made either via a salary sacrifice arrangement through your employer or via a personal lump sum contribution and completing a “notice of intent to claim or vary a deduction for personal super contributions (NAT 71121)” form.
It’s important to note that this needs to be considered as part of your total income tax position, as for some people, you may end up paying more tax if you do this. So, it’s important to get professional advice before you consider this.
How Do Taxes on Transition to Retirement Work?
If you have reached preservation age and are still working, you may be able to access your superannuation via a Transition to Retirement (TTR) income stream.
Tax Considerations if You Are Under 60
If you are 55-59 you are taxed at your marginal tax rate. However, you will also benefit from a 15% tax offset.
The earnings of a TTR are also taxed the same as a Superannuation account being, taxed at 15%. Furthermore, any Capital Gains Tax is 33.33% of this amount (i.e., 10%).
Tax Considerations if You Are 60 or Older
If you are over age 60, income payments are generally tax free.
What is SAPTO and How Does it Impact Tax Payments?
SAPTO can reduce the amount of income tax you pay. The ATO will automatically apply the non-refundable SAPTO offset when they assess your tax return. You may also be able to transfer any unused amount to your spouse if you’re both eligible for SAPTO.
The benefit of the SAPTO is that pensioners will not pay tax if their total income is below $31,888 for each member of a couple or $35,812 for a single (in the 2024/2025 financial year).
How Can I Maximise My Retirement Income and Minimise Taxes?
There are many things to consider when planning your retirement income. By taking advantage of the current rules available, it is possible to structure your financial plan so you may end up paying little or no income tax at all.
While no two individuals are the same, it is important to plan out your goals and objectives to ensure that you are using the most beneficial strategies and structures available to you.
It’s also important to get specialist advice to ensure that you are aware of the applicable strategies and structures available to you to minimise any tax and to maximise your retirement income.
Book a Free Consultation with an Experienced Retirement Planner
As you can see from this article, there are many things to consider when planning your retirement income and to ensure that you minimise any taxes you may pay. No one strategy or solution is right for everyone.
The most important thing to get in place first is an understanding of your goals and objectives. Once these have been determined, you can then set out to establish the foundations of your financial plan for the future.
If you are retired or planning your retirement and want to ensure that you have appropriate financial arrangements in place to achieve your goals and objectives, we can help. Getting started is very easy; simply contact our office or book a consultation with one of our financial advisers.
FAQs
What is the tax rate for retirees in Australia?
The tax rate of retirees in Australian is taxed at the same rates prior to retirement. However, some retirees may quality for the SAPTO. Account Based Pension income is tax-free once you attain age 60.
What are tax-free pensions and benefits in Australia?
While the Age Pension is not tax free, some pension payments and allowances from Centrelink are tax free. Some of these include:
- Carer payments (under age pension age)
- Disability support pension payments
- Invalidity Service pension
- Partner service pension
How much can a pensioner earn before paying tax in Australia?
The Seniors and Pensioners Tax Offset allows pensioners to earn up to $31,888 for each member of a couple or $35,812 for a single before paying income tax (in the 2024/2025 financial year).
Is super pension counted as income?
If you are over age 60, super pension income payments are generally tax free. If you are 55-59, super pension income payments are generally taxed at your marginal tax rate. However, you also benefit from a 15% tax offset.
Solace Financial is the trading name of the entities that are Authorised Representatives of SFDS Pty Ltd (AFSL 509493). This website contains general advice which does not consider your particular circ*mstances. You should seek advice from Solace Financial who can consider if the strategies and products are right for you.
Solace Financial is the trading name of the entities that are Authorised Representatives of SFDS Pty Ltd (AFSL 509493). This website contains general advice which does not consider your particular circ*mstances. You should seek advice from Solace Financial who can consider if the strategies and products are right for you.
