Use this part if the payee:
- was 60 years old or older for the full financial year and they started their capped defined benefit income stream for the first time part-way during the year [complete Step 1(a)], or
- turned 60 during the financial year and are in receipt of a capped defined benefit income stream [complete Step 1(b)], or
- was aged 59 years or younger for the full financial year and has a capped defined benefit income stream that is a reversionary death benefit income stream where the deceased was aged 60 or over at the time of death [complete Step 1(c)].
Note: If the payee is in receipt of multiple capped defined benefit income streams (maybe from multiple sources) or where the payee is in receipt of their own income stream at the same time as they are receiving a reversionary death benefit income stream, then the reduction of the cap may not be correct in all circumstances.
Steps to reduce the defined benefit income cap
Step 1 |
Use whichever is applicable to the payee's circumstances:
Note: Make sure you include the day they turned 60 or the day the income stream starts in your calculations. These steps are illustrative for the 2021-22 financial year. |
---|---|
Step 2 |
Days worked out from Step 1 as a percentage of the year (number of days ÷ 365 × 100) |
Step 3 |
Multiply the general defined benefit income cap ($106,250) by Step 2. The result is the payee's reduced defined benefit income cap. |
Step 4 |
Work out the withholding amount using the reduced defined benefit income cap. Refer to the examples for guidance. |
These examples use the PAYG withholding tax tables that apply from 13 October 2020.
Examples: Case E (i): Turning 60 during the financial year
On 1 July 2021 Loraine was 59 years old receiving a capped defined benefit income stream for the full year. Loraine turns 60 on 12 September 2021. Loraine's income stream paid to her prior to turning 60 will be taxed according to part A.
The character of this income changes when she turns 60 and, therefore, she will be subject to a different tax treatment on the income she receives after she turns 60.
To calculate withholding on any payment made on or after Loraine's birthday, apply the steps outlined in this example.
Loraine receives a fortnightly income stream of $5,200 for the full year, made up of the following:
- a tax-free component of $400
- a taxable component – taxed element of $4,800.
A. Work out Loraine's reduced defined benefit income cap for the 2021–22 financial year as follows:
- Step 1: Number of days from Loraine's birthday to 30 June 2022 is 292.
- Step 2: Step 1 result expressed as a percentage of the year: 292 ÷ 365 = 80%
- Step 3: Multiply the general defined benefit cap by Step 2 result: $106,250 × 80%.
Loraine's reduced defined benefit income cap is $85,000.
B. Annualise the components that make up Loraine's super income stream:
- a fortnightly tax-free component of $400. Annualised amount $10,400 ($400 × 26)
- a taxable component - taxed element of $4,800. Annualised amount $124,800 ($4,800 × 26)
C. Add the annualised amounts of each component $10,400 + $124,800 = $135,200
D. Work out the amount of income Loraine earned after she turned 60.
Multiply the annual equivalent (step C) of Loraine's fortnightly super income stream by the percentage worked out at Step 2. $135,200 × 80% = $108,160
E. Work out the remaining fortnights in the financial year from when Loraine turned 60 that withholding applies: 292 days ÷ 14 days = 20
F. Work out the withholding rate as follows:
(i) Calculate the fortnightly equivalent of the amount in excess of her reduced cap of $85,000.
$108,160 − $85,000 = $23,160
Loraine is paid fortnightly, therefore:
$23,160 ÷ 20 (remaining fortnights) = $1,158 (ignoring cents)
(ii) Divide the amount calculated at (i) by two.
$1,158 ÷ 2 = $579 (rounded to the nearest dollar)
(iii) Use the Fortnightly tax table to calculate the withholding amount relevant to the amount worked out in (ii).
As Loraine has claimed the tax-free threshold the withholding amount is $0.
Note: You will need to provide a PAYG payment summary – superannuation income stream for payments made to the payee before turning 60 and a separate payment summary for payments made to the payee after turning 60, even if the withholding amount is zero.
If a payee only had an untaxed element or a combination of all three elements then you will need to go to part C or part D respectively to work out the withholding after determining the reduced defined benefit income cap. However, the following changes to certain steps in each of these parts will be required:
- Multiply Step 2 of part C or Step 1 of part D (the annualised amount) by the percentage of the financial year the payee is 60 years or over (the figure from Step 2 in the Steps to reduce the defined benefit income cap section). Use this figure in the relevant steps in part C or part D instead of the annualised amount.
- In Step 2 of part B or Step 3 and Step 5 of part D, divide the relevant excess amount by the number of the relevant periods in the financial year since the payee turned 60 to the end of the financial year.
- In Step 3 of part C and Step 7 of part D, divide the relevant capped offset amount by the number of relevant periods in the financial year since the payee turned 60 to the end of the financial year.
Case E (ii): Turning 60 during the financial year – income stream made up of other components
Using Loraine's circumstances from the previous example, if Loraine receives fortnightly income of $6,000 which was made up of $2,000 tax-free component, $3,000 taxed element and $1,000 untaxed element. Loraine turns 60 on the 12 September 2021.
Step 1: Convert all the components of the income stream to an annualised amount. Total income stream $6,000 × 26 = $156,000
Taxed element $3,000 × 26 = $78,000
Untaxed element $1,000 × 26= $26,000
Tax-free component $2,000 × 26 = $52,000
Step 2: Apply the percentage that Loraine was over 60 to the whole of the annualised income stream $156,000 × 80% = $124,800
Step 3: From Step 2 in part D, add together the annualised tax-free component and taxed element that has been reduced by applying the percentage Loraine was over 60. $41,600 + $62,400 = $104,000
Step 4: Subtract Loraine's reduced cap of $85,000 from $104,000. Result is $19,000
Step 5: Divide the result in Step 4 by the remaining fortnights $19,000 ÷ 20 = $950 (ignore cents)
Step 6: Divide the amount at Step 5 by two. $950 ÷ 2 = $475. Add Loraine's fortnight untaxed element amount $1,000. This totals $1,475. Using the Fortnightly tax table the withholding amount for $1,475 is $174.
As Loraine's annualised tax-free component and taxed element is above her cap (as per Step 4 above) no tax offset is applicable.
End of example
Examples: Case E (iii): Starting an income stream during the financial year
Sarah is 65 years old and she first starts her capped defined benefit income stream on 30 December 2021.
Sarah's reduced defined benefit income cap for the 2021–22 financial year is worked out as follows:
- Step 1: Number of days from Sarah's first income stream payment to 30 June 2022 = 183
- Step 2: Step 1 result expressed as a percentage of the year: 183 ÷ 365 = 50.137%
- Step 3: Multiply the general defined benefit cap by Step 2 result: $106,250 × 50.137%
Sarah's reduced defined benefit income cap is $53,271 (rounded to the nearest dollar).
Sarah’s income stream for the period between 30 December 2021 and 30 June 2022 comprises:
- taxable component – taxed element: $45,000
- taxable component – untaxed element: $19,500
- tax-free component: $13,000
Sarah’s total income stream payments from 30 December 2021 is $77,500.
Sarah is paid fortnightly and claims the tax-free threshold.
As Sarah is paid fortnightly, you will need to work out the remaining fortnights that withholding applies in the financial year from when the income stream commenced to be paid: 183 days ÷ 14 days = 13
Work out the amount subject to withholding
Step 1: Add together all the components.
$45,000 + $19,500 + $13,000 = $77,500
As the sum is over the $53,271 reduced cap, proceed to Step 2.
Step 2: Add together the tax-free component and taxed element. Subtract the $53,271 reduced cap from this amount.
Sum the tax-free component and taxed element
$45,000 + $13,000 = $58,000
Amount in excess of cap
$58,000 − $53,271 = $4,729
Step 3: Calculate the fortnightly equivalent of the amount in excess of $53,271 calculated at Step 2 by using the number of remaining fortnights in the financial year from when the income stream commenced.
$4,729 ÷ 13 = $363 (ignore cents)
Step 4: Divide the amount calculated at Step 3 by two.
$363 ÷ 2 = $181 (ignore cents)
Step 5: Calculate the fortnightly equivalent of the untaxed element of the taxable component using the remaining fortnights in the financial year from when the income stream started and add it to the amount calculated at Step 4
($19,500 ÷ 13) = $1,500
$1,500 + $181 = $1,681
Step 6: Using the Fortnightly tax table, the withholding amount relevant to the amount calculated in Step 5 is $218.
Calculate the tax offset applicable
Step 7: Determine any entitlement to the tax offset. As the sum of Sarah's taxed element and tax-free component is over $53,271, she is no longer eligible for a tax offset for the untaxed element.
If Sarah were eligible, you would apply the following:
- If the sum of the tax-free component and taxed element is less than the reduced cap, the payee is entitled to a reduced tax offset. Subtract from the reduced cap the sum of the tax-free component and the taxed element from Step 2 and apply 10% to this amount. The result is the tax offset amount the payee is entitled to for the financial year.
- Calculate the weekly, fortnightly or monthly equivalent of this tax offset amount for the remaining weeks, fortnights or months that withholding applies in the financial year from when the income stream commenced to be paid. For example, if the income stream started on 30 December 2021 and you pay the payee weekly divide the amount by 26. If you pay fortnightly, divide the amount by 13. If you pay monthly, divide the amount by 6 (ignore cents in the result).
Work out the amount to withhold
Step 8: Amount to withhold = withholding amount (Step 6) − tax offset (Step 7)
= $218 − 0
Total amount to withhold is $218.
Case E (iv): Starting an income stream during the financial year – income stream does not include all components
If Sarah only had a tax-free component and/or a taxable component - taxed element or an untaxed element, then you will need to go to part B or part C respectively to work out the withholding after determining the reduced defined benefit income cap. However, the following changes to certain steps in each of these parts will be required:
- In Step 1 of part B and Step 2 of part C instead of converting the income stream payment to an annualised amount, use the Conversion table for income streams commencing during current financial year to work out the converted amount of the super income stream. Use this figure in the relevant steps in part B or part C instead of the annualised amount.
- In Step 2 of part B, divide the relevant excess amount by the number of remaining periods in the financial year since the income stream started or the payee turned 60 to the end of the financial year. Use the Conversion table for income streams commencing during current financial year to work out the appropriate date.
- In Step 3 of part C, divide the relevant capped offset amount by the number of remaining periods in the financial year since the income stream started or the payee turned 60 to the end of the financial year. Use the Conversion table for income streams commencing during current financial year to work out the appropriate date.
Example: Case E (v): Reversionary death benefit income where the payee is under 60 years old and the deceased was at least 60 years old
Freya, 59, receives a defined benefit income stream in her own right, and her income stream is taxed under part A of this schedule.
Freya's partner died on 27 February 2022; Freya's partner was aged 61 at the time of death and was in receipt of a defined benefit income stream with both tax-free components and taxable components. Freya is now entitled to a reversionary death benefit income stream.
As Freya has an existing capped defined benefit income stream, Freya's reversionary death benefit income stream will be subject to additional taxation arrangements.
Freya's reduced defined benefit income cap for the 2021–22 financial year is worked out as follows, based on her reversionary death benefit income stream:
- Step 1: Number of days from Freya's first income stream payment to 30 June 2022 is 124
- Step 2: Step 1 result expressed as a percentage of the year: 124 ÷ 365 = 33.973%
- Step 3: Multiply the general defined benefit cap by Step 2 result: $106,250 × 33.973%
- Freya's reduced defined benefit income cap is $36,096.
Freya was also receiving a defined benefit income stream in her own right, her defined benefit income cap will be further reduced by the amount from this income stream that she receives over the same period.
Freya is paid fortnightly and her own super income for the financial year is $70,000, which comprises:
- taxable component – taxed element $60,000
- taxable component – untaxed element $0
- tax-free component $10,000.
Her own income stream is taxed under part A of this schedule.
Freya's defined benefit income cap is reduced further by the amount of her personal super income for this period of time: $36,096 − (0.33973 × $70,000).
Freya's reduced defined benefit cap is now $12,315 (rounded to the nearest dollar)
Freya's reversionary death benefit income stream comprises:
- taxable component – taxed element $30,000
- taxable component – untaxed element $10,000
- tax-free component $10,000.
Freya's total reversionary income stream payment from 28 February 2022 is $50,000.
Reversionary income in excess of the reduced cap of $12,315 is $37,685.
Calculate Freya's withholding on her reversionary income stream
Use part C to work out Freya's withholding amount, however you will need to work out the remaining fortnights in the financial year from when the income stream started, to apply the correct withholding as per previous examples.
Step 1: Calculate the fortnightly tax-free component and taxed element in excess of the reduced cap.
$40,000 − $12,315= $27,685
Freya is paid fortnightly from 28 February 2022, therefore:
$27,685 ÷ 8 = $3,460 (ignoring cents)
Step 2: Divide the amount calculated at Step 1 by two.
$3,460 ÷ 2 = $1,730 (ignoring cents)
Step 3: Convert the untaxed element into fortnightly payments.
$10,000 ÷ 8 = $1,250
Step 4: Add the amounts calculated at Step 2 and Step 3
$1,730 + $1,250
= $2,980
Step 5: Use the Fortnightly tax table to calculate the withholding amount relevant to the amount worked out in Step 4.
Freya recognises that she has multiple taxable income streams and, therefore, has not claimed the tax-free threshold on her reversionary income stream payment. Therefore, the withholding amount on $2,980 is $904.
Step 6: As the reversionary income stream tax-free and taxed element components totalled more than Freya's reduced defined benefit income cap, she is not entitled to a tax offset.
PAYG payment summary reporting
Freya will receive two PAYG payment summaries – superannuation income stream:
(1) PAYG payment summary – superannuation income stream
(personal income stream)
Applicable dates: 01/07/2021 – 30/06/2022
Tax withheld $2,184
Taxable component – taxed element $60,000
Taxable component – untaxed element $0
Tax-free component $10,000
Tax offset $9,000
(2) PAYG payment summary – superannuation income stream
(reversionary death benefit income stream)
Applicable dates: 28/02/2021 – 30/06/2022
Tax withheld $7,232
Taxable component – taxed element $30,000
Taxable component – untaxed element $10,000
Tax-free component $10,000
As the source of this income stream was from an income stream that was subject to concessional tax treatment, no tax offset should be provided on the payment summary. The ATO will calculate any entitlement to a tax offset upon assessment.
If Freya's circumstances were different:
You would not reduce Freya’s defined benefit income cap and you would follow the steps in part B, part C or part D (as applicable) to calculate the withholding amount if:
- Freya was 60 years or over for the full financial year and was receiving the reversionary income stream for the full financial year, whether her husband died before or after he was 60, or
- Freya turns 60 during the financial year and her husband died aged 60 or over, and she was in receipt of the reversionary death benefit income stream for the full financial year.
If Freya was under 60 for the full financial year and Freya's husband had died before he turned 60, you would not reduce the defined benefit income cap and you would follow the steps in part A to calculate the withholding amount.
If Freya turns 60 during the financial year and her husband died aged under 60, and she was in receipt of the reversionary death benefit income stream for the full financial year, you would reduce the defined benefit income cap based on the date she turned 60 years of age and you would follow the relevant steps that are set out in the Loraine examples to calculate the withholding amount.
If Freya was 60 or over for the full financial year or turns 60 during the financial year, and she received the reversionary death benefit income stream for part of the year you would reduce the defined income cap based on either the day she turned 60 or the start of the income stream. You would follow the steps in part B, part C or part D (as applicable) to calculate the withholding amount. However, the following changes to certain steps in each of these parts will be required:
- In Step 1 of part B and Step 2 part C or part D, instead of converting the income stream payment to an annualised amount, use the Conversion table for income streams commencing during current financial year to work out the converted amount of the super income stream. Use this figure in the relevant steps in part B, part C or part D instead of the annualised amount.
- In Step 2 of part B or Step 3 and Step 5 of part D, divide the relevant excess amount by the number of remaining periods in the financial year since the income stream started or the payee turned 60 to the end of the financial year. Use the Conversion table for income streams commencing during current financial year to work out the appropriate date.
- In Step 3 of part C or Step 3 and Step 5 in part D, divide the relevant capped offset amount by the number of remaining periods in the financial year since the income stream started or the payee turned 60 to the end of the financial year. Use the Conversion table for income streams commencing during current financial year to work out the appropriate date.