Understanding Tax Returns in Retirement

Retirement is a time to enjoy the fruits of your hard work and not worry about complicated tax obligations. However, changes to income streams can add a layer of confusion to tax time. As a retiree or someone nearing retirement, understanding your obligations is important to avoid unexpected penalties.

In this guide, we’ll break down what happens to your tax return once you retire and the best ways to approach tax post-retirement.

Do I Have to Pay Tax Once I’ve Retired?

For some retirees, a tax return may not be required. If your only source of income is the Age Pension or a similar government pension, you’re typically not required to lodge a tax return. However, you must still inform the ATO by submitting a non-lodgement advice form (read on for more details on completing this).

However, it’s not always that simple. You may still need to lodge a tax return in retirement if you’re receiving income on top of your pension payments — such as investments, part-time work, income from a business, or rental income.

The threshold for assessable income is currently set at $18,200, less any applicable tax offsets like the Seniors and Pensioners Tax Offset (SAPTO). Additional income streams that could push you over this threshold include:

• — Investment income
• — Part-time employment
• — Income from a business you own
• — Rental income from investment properties
• — Inheritance, insurance payouts, or compensation
• — Foreign income

If your total income surpasses the tax-free threshold, you’ll be required to lodge a tax return.  

Tax Offsets for Retirees

As a retiree, tax offsets can significantly reduce or eliminate your tax liability. Two key offsets to consider include the Seniors and Pensioners Tax Offset (SAPTO) and the Superannuation Income Stream Tax Offset.  

Seniors and Pensioners Tax Offset (SAPTO)

SAPTO is designed to reduce the amount of tax you need to pay. If you’re eligible, it could mean that even with additional income, you won’t have to lodge a tax return. To qualify, you must either:

• — Be eligible to receive the Age Pension or Department of Veterans Affairs (DVA) Pension, or
• — Pass a rebate income threshold test that determines your entitlement to a full or partial offset.

 

Superannuation Income Stream Tax Offset

While many retirees enjoy tax-free income from their account-based pension accounts, the Superannuation Income Stream Tax Offset applies in some cases. This tax offset typically applies to those receiving Defined Benefit schemes, such as the Commonwealth Superannuation Scheme (CSS) or Public Sector Superannuation (PSS) — lifetime, indexed pensions provided by the government.

Additionally, the offset may apply if you start drawing an income stream from your Superannuation before turning 60, such as through a disability pension.

In the above cases, you may be entitled to a tax offset. This can be 15% of the taxed element or 10% of the untaxed element.

The exact tax offset amount for the taxed element will be detailed on your PAYG payment summary. However, for the untaxed element, the offset is limited and will not appear on your payment summary. The current limits are:

• — $11,875 for the 2023–24 income year
• — $10,625 for the 2021–22 and 2022–23 income years
• — $10,000 for 2020–21 and earlier income years

 

Tax Returns for Trustees of an SMSF

If you’re the trustee of a Self-Managed Super Fund (SMSF), you are required to lodge a tax return, even in retirement. Managing an SMSF comes with additional responsibilities, including tax reporting and compliance. Ensuring that you meet all your obligations is crucial to avoid penalties from the ATO.  

Tax-Free Super Pension Recipients

If you’re receiving a tax-free super pension, and it’s your only source of retirement income, you generally won’t be required to lodge a tax return. This applies to many retirees who receive their income entirely from a tax-free superannuation pension, allowing them to enjoy their retirement without the burden of annual tax filings.

Claiming Franking Credits

If you’ve received franking credits during the financial year but aren’t required to lodge a tax return, you can still claim a refund for these credits. This is especially relevant for retirees who might not have other income that requires a tax return. Fortunately, the process is straightforward and can be done in several ways to suit your preference:

1. Online: Simply log into your myGov account linked to the Australian Taxation Office (ATO) and follow the instructions to apply for a refund.

2. Phone: You can contact the ATO directly and request a refund over the phone. They can guide you through the process and ensure everything is completed correctly.

3. Mail: Alternatively, you can complete and send the Application for Refund of Franking Credits for Individuals form by post. This form can be downloaded from the ATO website or requested by phone.

Remember, claiming these credits helps ensure you’re not missing out on benefits you’re entitled to.  

When You Don’t Need to Lodge a Tax Return

For retirees or anyone not required to file a tax return, it’s important to notify the Australian Taxation Office (ATO) by submitting a non-lodgement advice form. This simple step lets the ATO know that you will not be filing a return for the financial year, preventing any unnecessary follow-ups or queries.  

You can notify the ATO in one of two ways:

1. Online Submission: You can easily complete and submit the non-lodgement advice form through your myGov account. This option is convenient and allows you to manage your tax affairs from the comfort of your home.

2. Through a Tax Agent: If you prefer, your tax agent can take care of this for you. They can complete and submit the form on your behalf, ensuring everything is handled correctly.

By submitting this form, you ensure that your tax records are up-to-date and reduce the likelihood of any unexpected correspondence from the ATO.  

If in doubt, seek expert advice…

Understanding whether or not you need to lodge a tax return in retirement can be complicated, especially with multiple income sources and tax offsets to consider. However, early planning and expert advice from a financial adviser can help you stay compliant and maximise your tax benefits. Seek guidance from a financial expert to ensure you meet all your tax requirements while making the most of available tax offsets.    

At Collective Wealth Advisers, we’re here to help you navigate the complexities of retirement tax planning, ensuring you remain compliant while making the most of your retirement income. Let us assist you in planning today, so you can focus on enjoying tomorrow.

Contact us today to learn how we can help you achieve your retirement goals.