Pension phase earnings tax relates to the tax rate applied to earnings received from investments supporting a superannuation pension.
Superannuation has an accumulation phase and a pension phase.
Pension phase is sometimes also referred to as superannuation drawdown phase.
Investment earnings within super are taxed differently depending on which phase your super is in.
A specific tax rate applies to earnings within both accumulation phase and pensions phase.
In fact, a different investment earnings tax rates apply to different types of pensions.
Earnings within superannuation can be divided into two forms.
Income returns include interest, dividends, rent, distributions, etc.
Examples of capital gains include share price increases or increases in property values.
The type of return (i.e. income or capital gains) determines how tax is applied.
The age of the superannuation member is irrelevant in determining the applicable tax rate.
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Tax free pension payments from an income stream over age 60 is often confused with earnings tax.
Pension payments are entirely different to earnings within a pension account.
The tax rate on pension payments from an income stream is based on the tax components of the pension balance and the age of the pension recipient (i.e. over or under age 60).
Whereas the type of account (accumulation / TTR Pension / account based pension), not the age of the member, determines the tax rate on earnings.
Pension Phase Earnings Tax
Tax on earnings in pension phase depends on the type of pension in place.
There are two main types of pension accounts.
Non-commutable pensions, otherwise known as transition to retirement (TTR) pensions are generally owned by people who have reached their superannuation preservation age, but continue to work.
Ordinary account based pensions are held by people who have satisfied the superannuation definition of retirement.
Read more about the difference between account based pensions and non-commutable pensions here.
Account Based Pension Earnings Tax
The tax rate applied to earnings derived from the investments supporting an account based pension is 0%.
All earnings, income and capital gains, within an account based pension are received completely tax free.
For example, an account based pension with a balance of $500,000 earning income at a rate of 4% p.a. would earn $20,000 p.a.
This $20,000 would be received completely tax free.
If the value of the assets in the account increased in price, the capital gains upon sale would be received tax free, also.
This is not income paid to the pension member as pension income; it is simply income earnings within the pension account itself.
TTR Pension Earnings Tax
The earnings tax rate within a non-commutable transition to retirement income stream is different to the tax rate within an ordinary account based pension.
Prior to 1 July 2017, all earnings within a TTR account were received tax free, just like an account based pension.
However, this changed with the introduction of the Transfer Balance Cap.
From 1 July 2017, income earnings within a TTR Pension account are taxed at 15%.
Using the same example above, the tax on $20,000 income would therefore be $3,000.
Capital gains within a non-commutable TTR Pension are taxed at 15%.
A 33% discount on capital gains is available if the asset sold was owned for longer than 12 months.
This means that an effective capital gains tax rate of only 10% would apply if the investment sold was owned for greater than 12 months.
For example, if an investment within a non-commutable TTR Pension was bought for $100,000 and sold for $150,000, the capital gain of $50,000 would be taxed at 15%, or $7,500.
However, had the investment been owned for longer than 12 months before being sold, only 10%, or $5,000, earnings tax would apply.
Accumulation Phase Earnings Tax
Earnings tax within accumulation phase of super remains unchanged.
All income and capital gains are taxed at 15%, with capital gains tax reducing to 10% if the investment owned was held for longer than 12 months.
Accumulation phase earnings tax is the same as earnings tax within a TTR Pension.
Adviser fees, administration costs and accounting fees are other examples of tax deductible expenses within super.
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Pension Phase Minimum Withdrawal
The superannuation pension phase rates for the minimum pension income withdrawal are unrelated to earnings tax.
The minimum withdrawal rates are based on the minimum pension factors.
The factors are expressed as a percentage of the account balance.
The minimum pension factor increases with age and is used to calculate the minimum pension income required to be made by the pension member in a given financial year.
The minimum pension income rates are as follows:
|Age||Pension Income Factor|
For example, a 77-year old with a pension balance of $300,000 must take a minimum pension income of $18,000 in the financial year.
The calculation of the minimum withdrawal rate is done on 1 July of each year.
You can use this calculator to calculate your minimum pension payments.
The same pension income factors and calculations are used for both account based pensions and TTR Pensions.
The only difference is that a TTR Pension also has an upper income threshold of 10% of the account balance.
An account based pension has no upper threshold.
The maximum income of an account based pension is only limited by the account balance.