So, you have decided to retire, and now you need to pick your retirement date. What is the best month to retire? Should I retire at the end of the financial year, at the end of the calendar year, or on my birthday? Will it change the amount of tax I pay?
Based on the current tax system in Australia there can be advantages to your retirement strategy, depending on when you retire.
In this article, we will explore some of the tax implications to consider and how they could impact the amount of tax you pay on pension income upon retirement.
What Are the Different Tax Implications of Retirement?
In Australia we have a progressive tax system. What this means is that you pay more tax as your income increases. So, for income earnt there is no fixed rate of tax, rather increasing tiers of tax rates as your income increases.
The good news is that the first $18,200 you earn each financial year is tax free!
Tax On Superannuation Withdrawals
If you reached preservation age, which is now age 60, and retired you can access your superannuation generally tax free (via lump sum withdrawal and/or pension payment). However, if you have any Taxable Competent (untaxed element) the pension payment will be taxed at your marginal rates less a 10% tax offset.
If you are under preservation age, pension payments will be taxed at your marginal rate less a tax offset of 15% on paying the Taxable Component (Taxed element). Remember that you will have to meet a condition of release to be able to access your superannuation before the preservation age.
For lump sum withdrawals, if you are under age preservation age and have met a condition of release, the whole taxable component (taxed element) is taxed at 20%. There are also different tax rates for the untaxed elements.
Capital Gains Tax
Depending on whether you hold an asset in your own name, in a trust, in a company, or in superannuation and investment assets, there can be different tax rates applied on any Capital Gain made when selling an asset/investment. For the purposes of this article, we will focus on personally held assets and superannuation owned assets.
If you sell your home, as long as it was not used to generate income, there is generally no capital gains tax payable. However, if you used your home to generate income, the portion of your home used to generate the income could have capital gain tax applied.
For investments held in your own name (investment property, shares, managed funds, etc.), any capital gain made upon sale will be added to your assessable income and used to calculate your taxable income. If you have held the investment for over 12 months, the assessable gain is generally halved.
Assets sold in superannuation accumulation phase can been taxed at marginal tax rate up to 15%. If the asset has been held for over 12 months a discount of 33.33% is applied.
Assets sold in account based pensions have no capital gains tax applied.
Medicare Levy and Other Levies
The Medicare levy is based on taxable income (excluding the taxable component of a super lump sum taxed at 0%). Individuals with taxable income above the upper threshold for singles may be eligible for a Medicare levy reduction based on their family income where they have a spouse or dependent children.
Once your income is above $29,206 for a single and $49,252 for a family, the Medicare levy rate is 2%. If you do not have adequate private health coverage, you may incur an additional Medicare levy surcharge of up to 1.50%.
How Does the Financial Year Impact Tax Calculations?
Based on the progressive tax system in Australia, your employer is required to withhold tax based on the income you earn each pay period. For example, if your salary was $100,000 per annum (in the 2024/2025 financial year), the amount of tax and Medicare levy payable would be $22,788 for the full financial year.
However, if you retired at the end of the 2024, you would have earned $50,000. The amount of tax and Medicate levy payable on $50,000 would be $6,788. So, if you had no other taxable income for the financial year, you would be entitled to a tax return of approximately $4,606 due to the higher amount of tax being withheld via your employer.
What is the Best Time to Retire?
So, when is the best time to retire? It really comes down to your personal circumstances and goals. By having a longer-term financial plan, consideration can be given to all of the aspects mentioned in this article. However, if you leave the retirement phase of your planning too late, you can reduce the options and strategies that may be available to you – resulting in more tax being paid.
End of Financial Year (June)
If you were to retire at the end of the financial year, you would have a whole year of extra income. However, you would also pay income tax (assuming your income is higher than $18,200). Furthermore, if you sold investments and incurred a capital gain, this would be added to your assessable income for the year and potentially increase the amount of tax and Medicare levy you pay.
In addition to this, if you have already retired and made a lump sum withdrawal from your Superannuation accumulation account, your fund could incur capital gains tax of up to 15% on any gain on the assets sold to fund the withdrawal.
Start of Financial Year (July)
If you retired in a new financial year, you would have no income tax on employment income as there is none. If you sold any investments, any taxable gain would first be applied to the Tax-Free threshold of $18,200 and then would pay tax, via the appliable tax tier rates.
In addition to this benefit, if you had reached preservation age and also commenced an Account Based Pension, any assets sold in your account to fund payments would not incur any tax.
Superannuation Considerations to Consider
If you have made personal superannuation contributions for which you wish to claim a tax deduction, you must lodge a Notice of Intent form with your superannuation fund (and wait for confirmation that they have received the notice and processed your request) prior to commencing an account based pension or rolling your funds to another fund to commence an account based pension. Otherwise, you will miss out on any claimable tax deduction.
When an account based pension commences part way through the financial year, the minimum pension payment is generally prorated based on the days remaining in the year. An exception occurs when an account based pension commences on or after 1 June in the financial year. Where this occurs, a minimum payment is not required for that financial year.
Planning for Capital Gains Tax (CGT)
When planning for CGT, it is important to consider when you will need to sell an asset, as any capital gain will be applied to your assessable other income stream. You have the ability to control when you trigger the GCT event. However, you may also need to consider the market trends and valuations at the time, as we do not know with certainty what the future valuations will be for the asset (i.e., they could be higher or even lower).
How Can Solace Financial Help With Financial Planning for Your Retirement?
As you can see from this article, there are many things to consider when planning your retirement. Everyone is different so it’s important to ensure that whatever option you use aligns with your longer-term goals and financial plan.
The most important thing to get in place first is an understanding of your goals and objectives. Once these have been determined, you can then set out to make money and establish the foundations of your financial plan for the future.
If you would like to explore possible retirement planning options or to enhance your current retirement income, we can help! Getting started is very easy, simply contact our office or book a consultation with one of our financial advisers.
