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  • Tax on benefits

    How tax applies to your super benefits depends on a number of factors such as your age and whether your super comes from a taxed or untaxed source.

    The tax treatment of both super and death benefits is also affected by whether the benefits are paid as:

    • a lump sum
    • a super income stream benefit – that is, regular payments paid from an account-based income stream or a capped defined benefit income stream.

    On this page:

    Tax on withdrawing your super

    The rate at which your super benefits are taxed will depend on several factors including:

    • your preservation age and the age you will be when you get the payment
    • whether the money in your super account is taxable or tax-free
    • whether you will get the payment as an income stream or a lump sum
    • the type of income stream.

    These factors determine whether you:

    • pay tax on the withdrawal (for example, whether it is taxable income)
    • get tax offsets that reduce the amount of tax you pay.

    Generally, your super benefits will include both a tax-free and a taxable component.

    See also:

    Tax on death benefits

    The tax on a death benefit depends on whether:

    • you were a dependant of the deceased
    • it is paid as a lump sum or a super income stream benefit
    • the income stream is an account-based or a capped defined benefit income stream
    • the super is taxable or tax-free, and whether the super fund has already paid tax on the taxable component
    • your age and the age of the deceased person when they died.

    If you are a dependant of the deceased, you do not need to pay tax on the taxable component of a death benefit if you receive it as a lump sum. If you receive the benefit as an income stream, different rates of tax may apply depending on the factors mentioned above.

    If you're not a dependant of the deceased, you can only receive the benefit as a lump sum. The taxable component of the payment will be entitled to a tax offset that ensures the rate of income tax is as follows:

    • taxed element – maximum of 15% plus Medicare levy
    • untaxed element – maximum of 30% plus Medicare levy.

    See also:

    Taxation of military invalidity benefits – appeal

    On 4 December 2020, the Federal Court handed down its decisions on:

    • Commissioner of Taxation v Douglas [QUD103/2020]
    • Commissioner of Taxation v Burns [QUD114/2020]
    • Commissioner of Taxation v Walker [QUD115/2020].

    The case is cited as Commissioner of Taxation v Douglas [2020] FCAFC 220. The court dismissed the Commissioner’s appeal in Douglas and Walker but allowed the appeal in Burns.

    The court ruled – in Commissioner of Taxation v Douglas and Commissioner of Taxation v Walker – that specific invalidity benefit payments paid under pensions that started on or after 20 September 2007 provided under the Defence Force Retirement and Death Benefits (DFRDB) Scheme and the Military Superannuation and Benefits (MSB) Scheme are super lump sum payments rather than super income stream benefits.

    We are developing a streamlined income tax amendment process for affected individuals who received these invalidity benefit payments.

    We have published information that will help you determine if you are affected. If you believe you are affected, our roadmap to remediationThis link will download a file will let you know when we aim to begin the streamlined amendment process and the likely timeframe for completion.

    We expect to provide more detailed information on the streamlined amendment process in April 2021.

    The court also determined – in Commissioner of Taxation v Burns – that specific invalidity benefit payments paid under pensions that started before 20 September 2007 provided under the DFRDB and MSB schemes are super income stream benefits and therefore have been taxed correctly.

    No application for special leave to appeal to the High Court of Australia was filed in relation to this matter and the matters in dispute are now complete.

    We will continue to tax these specific invalidity benefit payments as super income stream benefits, in line with the Full Federal Court decision.

    See also:

    Last modified: 10 Mar 2021QC 23237