This page has general information on the PAYG taxation and Services Australia (Centrelink) treatment of lifetime pensions (including the different treatment for pensions paid from a taxed source versus an untaxed source). The information below is based on ElectricSuper’s current understanding of the applicable taxation and Services Australia legislation. If you are considering making any changes to your pension, we strongly recommend you seek independent financial advice which will take into account your personal objectives, financial situation and needs.

PAYG taxation of pensions

 

PAYG tax is calculated and withheld (where applicable) from each pension payment made to you. It is calculated on a per payment basis. The following information is considered when these calculations are completed:

  • The source of your pension – whether your pension is paid from a taxed or untaxed source
  • The information you supplied on your ATO Tax File Number Declaration form
  • Your age
  • The amount of assessable income in each payment
  • The relevant taxation tables that apply at the time that the payment is made

(Further information can also be found on the ATO website at www.ato.gov.au)

Important Note:

Effective 1 July 2017, there are new rules which apply for lifetime pensions if your gross annual pension is over $100,000 per year, or if you have over $1.6m held in super pension products (including lifetime and account-based pensions). In these cases, additional tax may apply and we suggest you seek further financial advice. The information shown in this fact sheet applies if your gross annual pension is under $100,000 per year.

We have summarized the PAYG tax treatment of both taxed source and untaxed source pensions below. Please note that ‘preservation age’ refers to the government’s (SIS) age-related preservation table (not preservation age under the ElectricSuper Rules).

Pensions paid from a taxed source

 

These pensions are paid assuming that any applicable contributions tax has been paid on the underlying investments and concessional contributions. Your pension will be made up of a tax-free component (not assessable for PAYG tax purposes) and the balance of your payments are considered to be Taxable -Taxed (Source).

As a result, a pension paid from a taxed source has the following taxation components:

 

PAYG tax treatment
Tax Free Component Taxable – Taxed Component
Under your preservation age Not assessable for income tax purposes Taxed at your marginal tax rate.
Preservation age to 60 Not assessable for income tax purposes Taxed at your marginal tax rate. An offset of 15% (0.15) of this component is applied when we make income payments.
Over 60 Not assessable for income tax purposes Not assessable for income tax purposes.

For example, if your tax free percentage was 50%, and your fortnightly pension was $1,000.00, then:

 

PAYG tax treatment
Tax Free Component Taxable – Taxed Component
Under your preservation age $500.00 per payment would be tax free. $500.00 per payment would be taxed at your marginal tax rate.
Preservation age to 60 $500.00 per payment would be tax free. $500.00 per payment would be taxed at your marginal tax rate. An offset of  $75.00 per payment would apply.
Over 60 $500.00 per payment would be tax free. Not assessable for income tax purposes.

Pensions paid from an untaxed source

 

These pensions are paid assuming that any applicable contributions tax has not been paid on the underlying investments and concessional contributions. As a result, a pension paid from an untaxed source has the following taxation components:

 

PAYG tax treatment
Tax Free Component Taxable – Untaxed Component
Under your preservation age Not assessable for income tax purposes regardless of age. Taxable at your marginal tax rate.
Preservation age to 60 Not assessable for income tax purposes regardless of age. Taxable at your marginal tax rate.
Over 60 Not assessable for income tax purposes regardless of age. Taxable at your marginal tax rate. An offset of 10% (0.10) is applied when we make income payments.*

(*For death benefits, the tax offset may apply irrespective of the pension recipient’s age.)

In the quote we supplied to you, we set out your Untaxed Percentage. This amount will apply to your pension payments, and the balance of your payment will be Tax Free. The details of the components applied to your payments are set out in your quote.

For example, if your Untaxed percentage was 90%, and your fortnightly pension was $1,000.00, then:

 

PAYG tax treatment
Tax Free Component Taxable – Untaxed Component
Under your preservation age $100.00 per payment will be tax free. $900.00 will be taxed at your marginal tax rate.
Preservation age to 60 $100.00 per payment will be tax free. $900.00 will be taxed at your marginal tax rate.
Over 60 $100.00 per payment will be tax free. $900.00 of your income payment will be taxed at your marginal tax rate. An offset of  $90.00 per payment would apply.

Changing the source of your pension

 

ElectricSuper’s Board currently has the discretion to offer each ElectricSuper lifetime pensioner the opportunity to change the source of their lifetime pension (ie. convert from a taxed source pension to an untaxed source, or vice versa). If a member requests such a change, it will generally take effect from the following 1 July, and apply for a minimum of 12 months. There is no fee to change the source of a lifetime pension.

Changing the pension source will affect the amount of PAYG tax deducted from your ElectricSuper pension payments, and may also affect the PAYG tax payable on income or benefits received from other sources (eg. Centrelink entitlements). If you are under age 60, the comparison will also change when you reach age 60.

Upon request, ElectricSuper can provide you (or your financial advisor) with a comparison quote which shows how your current pension benefits would change if you converted to the other source. Some information is unknown when we prepare your quote, so we may be unable to give you exact details of the PAYG tax payable should you elect to swap to the other source. However, your accountant or financial advisor should be able to help you to calculate these tax amounts using the information contained in this fact sheet.

If you are considering changing the source of your pension, we strongly suggest that you seek independent financial advice to see how this change will affect you.

Centrelink Assessment

 

Centrelink considers these accounts to be a Defined Benefit Income Stream. When assessing your income, Centrelink require the following information:

  • The gross payment per fortnight
  • The tax free amount

Centrelink will apply the appropriate income test on the difference between the gross payment, and the tax free amount. For Centrelink purposes, the tax free amount is capped at 10%.

For example, if your fortnightly income payment was $1,000.00, and your tax free amount was $500.00, then:

Centrelink Tax Free Amount = $100.00 (10% of $1,000.00)

Centrelink Assessable income= $1,000.00 -$100.00 = $900.00

Sustainable Superannuation Reforms (from 1 July 2017)

 

From 1 July 2017, we will be required to report your income for the purposes of assessing any applicable Transfer Balance Amounts. Your assessment will be based on your overall superannuation position (ie all superannuation accounts and income streams that you hold). ElectricSuper may be required to withhold additional amounts of PAYG, or you may be required to include amounts in your income tax returns. Both the Australian Taxation Office and ElectricSuper will contact you if this is the case.

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