Q I am 55 years old, medically retired, and receive a defined benefit pension from the NSW Sate Government of $40.000.00 . I have another Superannuation fund that is not a defined benefit fund. I am aware I am able to take $175000 as a lump sum ,tax free, if I wish. However I am told I still need to declare it in my tax return. Will this affect the tax I pay on my pension, and will it affect the tax I pay on the $4000.00 of bank interest I earn each year. Will it have an impact on any other rebates or tax offsets
A. As you are over age 55 and retired, you satisfy a condition of release that allows you to take Superannuation as either a lump sum or as an Income stream.
You are correct, from age 55 -60 you are entitled to take a lump sum of up to $175,000 of your Taxable Component (Low Rate Cap) without incurring lump sum tax. The Tax free component is tax free on withdrawal regardless of age provided a condition of release is satisfied. Amounts above $175,000 of the Taxable Component are taxed at 15% + Medicare Levy . If you were 60 or over the entire amount would be non-assessable and hence tax free.
Being between age 55 and 60, even though the $175,000 (Taxable Component) amount can be taken tax free, it is still considered Assessable Income for tax purposes albeit taxed at 0%. Whilst it is treated as assessable income, it will not impact on the tax payable on your Defined Benefit Pension nor bank interest.
As it is treated as Assessable Income it does however impact on qualification for the Government Superannuation Co-Contribution, Low income tax Offset, Mature Age Worker Tax Offset and Family Tax Benefits.
Note it does not count towards the cap for the Medicare Levy Surcharge or Exemption, or the Private Health Insurance Rebate. Amounts in excess of the Low Rate Cap of $175,000 will count for these purposes.
Worth noting, Superannuation Lump Sums taken under the Low Rate Cap in the 2011-12 tax year were counted in the calculation of the Flood Levy ½ % up to $50,000 and 1% for amounts over $100,000.
You will need to weigh up the benefit of accessing a Superannuation Lump Sum now against the loss of any Government Benefits or offsets. An alternative could be to draw smaller amounts as lump sums over various tax years or defer making a decision until after age 60.
The above Q & A was originally published in The Australian