Working in Retirement – Your Tax position
As you would have read elsewhere in the site, if you retire and are aged 60 or over, any super income streams you receive, or lump sum payments, are typically tax free. The exception is where you are a member of an "untaxed" superannuation fund, which are usually government schemes where the benefits have not been subject to taxation during accrual.
Note also that if your superannuation is moved out of the accumulation phase into the pension phase, then no tax applies in relation to fund earnings. As long as your funds remain in the accumulation phase, they remain subject to a 15% earnings tax.
Remember that accessing superannuation generally requires that you meet a "condition of release" before age 65. Once you reach age 65, you have automatic access to your superannuation funds without being required to meet another condition of release.
How will you be Taxed
A. Age 60 to Pension Age
The starting position for most people who have access to superannuation income streams post age 60 is that this income is tax-free, and that the supporting investments within their superannuation fund are also not subject to tax.
Without considering, for the moment, how any employment income might affect the Age pension or other social security benefits, calculating how any additional employment income you earn is taxed depends on two main factors: A) the tax free threshold and ordinary tax tables, and B) the Seniors and Pensioners Tax Offset (SAPTO). SAPTO is applicable only once you have reached Age pension age and your income is below a certain level.
For those who do not qualify for SAPTO, from the tax table below you will see that you will not normally pay income tax on the first $18,200 earned per annum in addition to super income - or $36,400 if you were a couple. However, there is an additional Low Income Tax Offset (LITO) - the maximum offset currently available is $445 which applies if your taxable income is below $37,000 per annum, decreasing at a rate of 1.5 cents per dollar of income above this amount and reaching zero at a taxable income of $66,667.
Additionally, a Low and middle income tax offset (LMITO) may also be available - the maximum offset is $1,080 per annum and the base amount is $225 - this is a non-refundable tax offset, not a payment, so you can't receive a refund for any unused amount of the offset. Quite complex, so see your tax advisor if you are in doubt regarding your position.
Current Resident Tax Rates 2020 - 2022
|Taxable income||Tax on this income|
|$0 – $18,200||Nil|
|$18,201– $45,000||19c for each $1 over $18,200|
|$45,001 - $120,000||$5,092 plus 32.5c for each $1 over $45,000|
|$120,001 - $180,000||$29,467 plus 37c for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45c for every $1 over $180,000|
B. Once you reach Pension Age
What is SAPTO and how do you qualify?
Quite frankly, SAPTO is difficult to explain simply. For what may be good reasons, pursuit of fairness, equity or whatever, it is almost impenetrable and therefore seniors don't appreciate that it can actually make it more attractive for them to continue working. Nevertheless, we do our best to summarise SAPTO in a simple fashion below and we have developed a couple of examples that might assist.
Firstly, SAPTO is a tax offset that is available for retirees who generally:
- Are of Age Pension age or older, or alternatively of Service Pension age - you don't actually need to be in receipt of a pension to qualify and therefore SAPTO extends to self-funded retirees who don't meet the Assets or Income test
- You meet Age Pension residency requirements (currently live in Australia and have been an Australian resident for at least 10 years)
- Have a "rebate income" that is lower than certain maximum levels which depend upon whether you are single, a couple or currently live apart because one of you is ill or in a nursing home, and
- If you have a spouse you need to work out whether they are eligible
What is Rebate Income?
"Rebate Income" is calculated taking your Taxable Income and adding back the following amounts, if applicable:
|+ Reportable Employer Super Contributions||$|
|+ Deductible Personal Super Contributions||$|
|+ Net Financial Loss claimed||$|
|+ Net Property Rental Loss claimed||$|
The ATO provide instructions annually which assist in working out eligibility - and to be frank again, simply following these instructions without understanding the underlying process is the least painful, but also least insightful, way of determining any entitlement.
What is the Tax Impact of SAPTO?
Once you have calculated your Rebate Income it drives your access to a tax offset. The Table below illustrates the Maximum Tax Offset available by category (Single, Couple separately and combined, Couple living apart) 2021/22. The maximum offset is available at a Rebate Income at or below what is called the "Full Offset Income Threshold" and it reduces at a rate of 12.5 cents for each $1 of taxable income above the Full Offset Income Threshold up to the "Shade-Out Income Threshold".
|Category||Maximum Tax Offset Available||Shading-Out Threshold||Cut-out Threshold|
|Couple (separated, living apart due to illness)||$4,080*||$31,279||$47,599|
A sample calculation to (hopefully) shed some light on how this works:
1) Without SAPTO
Individual has a Taxable Income of $32,279
From above, bearing in mind LITO and LMIT offsets, tax payable on $32,279 would be:
Tax on Income: $2,675.01
LITO Offset: ($700.00)
LMIT Offset ( $255.00)
Tax Payable = $1,720.01
2) With SAPTO
Tax of $1,720.01 is totally offset by maximum SAPTO of $2,230 = Nil Tax
Finally, bear in mind that while no income tax may be payable as a consequence of SAPTO, you may still be liable to pay the Medicare levy, which is based on taxable income.
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