How do we apply the 30% on earnings for super funds over $3 million to government defined benefit pensions? I think it is easy!

The 30% only applies during the accumulation phase, and there is no accumulation phase for a defined benefit fund, as the government employees in these schemes are not accumulating anything. Rather they are hoping the Government will be solvent enough when they retire to give them an amount of money each year.

But obviously, paying 30% during the accumulation phase of an SMSF/larger fund effects the amount received in retirement, so to be fair there will need to be a reduction in many defined benefit payouts to reflect the effect the new 30% tax rate has on non-defined benefit super.

Once you get to retirement, a defined benefit fund can pay you $118,750 a year tax-free (based on a $1.9 million cap starting 1 July 2023 divided by 16). Above that ,you get taxed at 15%. But note this $118,750 threshold is based on an equivalent of having $1.9 million in super. So let’s do the same for $3 million in super…

The simplest way to do this is to say that once you have a defined benefit pension yearly amount that is more than $187,500 ($3 million divided by 16), the tax rate that applies above the tax free amount (the $118,750 from above) up to $187,500 is 15% and the amount above $187,500 is taxed at 30%. 

What does this mean…

Bill has a Government defined benefit pension of $200,000 a year. Before 1 July 2025 he takes pay tax of 12,187.50 ($200,000 less 118,750 multiplied by 15%) leaving him with $187,812.

Now from 1 July 2025, as he gets more than $187,500 he applies the 15% tax rate on the amount of $187,500 less $118,750 (tax of $10,312.50) and applies the tax rate of 30% on the amount above $187,500 (tax of $3,750)

Let’s hear the Government employees complain about this – you can’t reduce my government pension!!!!


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