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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, or
    • an income stream – 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
    • whether it is paid as a lump sum or an income stream
    • whether the income stream is an account-based or a capped defined benefit income stream
    • whether 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

    The ATO has appealed to the Full Federal Court against the Administrative Appeals Tribunal decisions in the matters of Douglas v Commissioner of TaxationExternal Link [2020] AATA 494, Burns v Commissioner of TaxationExternal Link [2020] AATA 671, and GDGR v Commissioner of TaxationExternal Link [2020] AATA 766.

    The litigation relates to whether invalidity benefits paid by the Defence Force Retirement and Death Benefits (DFRDB) Scheme and the Military Superannuation and Benefits (MSB) Scheme are taxed as superannuation income stream benefits or as superannuation lump sums.

    What this means for you

    Until the appeals process is completed, we will continue to administer the taxation of invalidity benefits paid by the DFRDB Scheme and the MSB Scheme in line with our current view that the invalidity benefits are superannuation income stream benefits.

    If you are affected by these decisions, we recommend you wait until the appeals process has been completed before:

    • seeking amendments
    • applying for a private ruling, or
    • objecting to your income tax assessments.

    Note: You can lodge an amendment request or an objection at a later time.

    The PAYG withholding tax rate for superannuation income stream benefits apply to invalidity benefits paid by the DFRDB Scheme and the MSB Scheme.

    If you're receiving invalidity benefits from the DFRDB Scheme or the MSB Scheme, you will need to declare this as superannuation income stream benefits in your income tax returns.

    See also:

    Last modified: 05 May 2020QC 23237