Are you thinking about retiring this year?
If you are planning to retire in 2017, you may be thinking about the tax you will have to pay on your retirement fund. There is nothing to worry about here; take a look at our guide below and understand how tax affects your retirement.
Lump Sum Payments at the End of Employment
If you are reaching the end of your working life, you and your employer will be focused on tying up loose ends and ensuring that all due payments are present and correct. These can include termination payments if your term of employment ends before your contract is complete, and unused holiday lump sums.
The Australian Tax Office will take these payments into account, however they will be taxed at a lower level than your standard income. You will receive a statement from your employer detailing whether this payment is Lump Sum A or Lump Sum B, and this must be recorded on your tax return.
Redundancy Payment
Redundancy payments below a certain amount are not taxable under Australian law. This amount is calculated based on the number of years you have spent in employment. Any redundancy payments received above this amount will have tax applied to them.
Early Retirement Tax
If you have been offered early retirement from your job, you may be worried about how this will increase the financial burden of your retirement years. In order to offset this burden, the ATO can assess your early retirement scheme and decide if you qualify for reduced rate tax.
Capital Gains Tax Issues
Of course, not everyone who is heading towards retirement is an employee. If you are a business owner, or own other professional assets that you will not require in retirement, you will probably want to sell them on.
The profit you make from this sale is likely to fall under the jurisdiction of capital gains tax. However, providing that the assets are business and not personal assets, you may qualify for an exemption, up to a limit of $500,000. Above this amount, tax will apply.
Tax on Superannuation Funds
In most cases, if you are drawing money from a superannuation fund on retirement, this will be tax free. However, this cannot always be relied upon. For example, if you are aged between 55 and 59, a component of your super fund withdrawal will be added to your total taxable income.
This will be taxable at the marginal tax rate, with an offset applied.
It is also important to check what type of super fund you have. If, like most supers, it is a taxed fund, you will not have to pay any tax on the benefits you withdraw from it. However, if tax has not yet been paid on the fund, this may be applied to the benefits withdrawn.
General advice warning: Any advice contained in these pages is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters and consult your accountant and or financial planner.
(Source: Feedsy Exclusive, Published on March 2, 2017)
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